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Introduction by Walter Block 

Economics in One Lesson 

The Ludwig von Mises Institute dedicates this volume to all of its 
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Economics in One Lesson 

Henry Hazlitt 

Introduction by Walter Block 

Ludwig von Mises Institute 

Auburn. Alabama 

Copyright © 1 946 by Harper & Brothers 

Introduction copyright © 2008 by the Ludwig von Mises Institute 

The Ludwig von Mises Institute thanks Three Rivers Press for permission to repro- 
duce the first edition of Economics in One Eesson. 

All rights reserved. No part of this book may be reproduced or transmitted in any 
form or by any means, electronic or mechanical, including photocopying, recording, 
or by any information storage and retrieval system, without permission in writing 
from the publisher. 

Originally published in the United States in hardcover by Harper & Brothers Pub- 
lishers, New York, in 1 946. Subsequently a revised edition was published in softcover 
by Three Rivers Press, an imprint of the Crown Publishing Group, a division of Ran- 
dom House, Inc., New York, in 1988. This edition is published by arrangement with 
Three Rivers Press. 

Produced and published by the Ludwig von Mises Institute, 518 West Magnolia 
Avenue, Auburn, Alabama 36832 USA. 

ISBN: 978-1-933550-21-3 

Printed in China 


Introduction by Walter Block vii 

Preface to the First Edition by Henry Ha 2 litt xi 

Part One: The Lesson 1 

1 The Lesson 3 

Part Two: The Lesson Applied 9 

2 The Broken Window 11 

3 The Blessings of Destruction 13 

4 Public Works Mean Taxes 17 

5 Taxes Discourage Production 23 

6 Credit Diverts Production 25 

7 The Curse of Machinery 33 

8 Spread-the-Work Schemes 45 

9 Disbanding Troops and Bureaucrats 51 

10 The Fetish of Full Employment 55 

1 1 Who’s “Protected” by Tariffs? 59 

12 The Drive for Exports 69 

13 “Parity” Prices 75 

14 Saving the X Industry 83 

vi Economics in One Lesson 

15 How the Price System Works 89 

16 “Stabilizing” Commodities 97 

17 Government Price-Fixing 105 

18 Minimum Wage Laws 115 

19 Do Unions Really Raise Wages? 121 

20 “Enough to Buy Back the Product” 133 

21 The Function of Profits 141 

22 The Mirage of Inflation 145 

23 The Assault on Saving 159 

Part Three: The Lesson Restated 173 

24 The Lesson Restated 175 

Introduction to the 2007 Edition of 

Economics in One Lesson 

W riting this introduction is a labor of love for me. You know how 
women sometimes say to each other “This dress is you!” Well, 
this book is me ! This was the first book on economics that just jumped 
out and grabbed me. I had read a few before, but they were boring. 
Very boring. Did I mention boring? In sharp contrast, Lconosnics in One 
Lesson grabbed me by the neck and never ever let me go. I first read it 
in 1963. I don’t know how many times I have reread it since then. 
Maybe, a half-dozen times in its entirety, and scores of times, partially, 
since I always use it whenever I teach introductory economics courses. 

I am still amazed at its freshness. Although the first edition 
appeared in 1946, apart from a mere few words in it (for example, it 
holds up to ridicule the economic theories of Eleanor Roosevelt, about 
which more below) its chapter headings appear as if they were ripped 
from today’s headlines. Unless I greatly miss my guess, this will still be 
true in another 60 years from now, namely in 2068. Talk about a book 
for the ages. Other books on Austrian economics, too, are classics, and 
will be read as long as man is still interested in the subject. Mises’s 
Human Action and Rothbard’s Man, Economy, and State come to mind in 
this regard. But those are epic tomes, numbering in the hundreds of 
pages. This little book of Hazlitt’s is merely an introduction, written, 
specifically, for the beginner. I wonder of how many introductions to a 

viii Economics in One Lesson 

subject it can be truly said that they are classics? I would wager very, 
very few, if any at all. 

There is nothing that pleases a teacher more than when that 
expression of understanding lights up a student’s face. The cartoons 
depict this phenomenon in the form of a light bulb appearing right 
above the depiction of the character. Well, let me tell you: I have got- 
ten more “ahas” out of introductory students who have read this 
book than from any other. I warrant that there have been more con- 
versions to the free market philosophy from this one economics book 
than, perhaps, from all others put together. It is just that stupendous. 
The only thing I regret in this regard is that never again will I read this 
book for the first time. That, gentle reader, is a privilege I greatly envy 
you for having. 

A word about style. The content, here, we can take for granted. 
But the number of economists who could really write can be counted 
upon one’s lingers, but Hazlitt is certainly one of them. His verbiage 
fairly leaps off the page, grabbing you by the neck. In fact, I now ven- 
ture a very minor “criticism”: the author of this book is so elegant a 
wordsmith that sometimes, rarely, I find myself so marveling at his 
presentation, that I take my eye off the “ball” of the underlying eco- 
nomics message. 

But enough of my personal slavering, drooling appreciation for Eco- 
nomics in One Lesson. Let us now get down to some specifics. The core of 
this book is, surely, the lesson', “the art of economics consists in looking 
not merely at the immediate but at the longer effects of any act or pol- 
icy; it consists in tracing the consequences of that policy not merely for 
one group but for all groups.” Coupled with Hazlitt’s suspicion of the 
“special pleading of selfish interests,” and his magnificent rendition of 
Bastiat’s “broken-window” example, the plan of Economics in One Lesson 
is clear: drill these insights into the reader in the first few chapters, and 
then apply them, relentlessly, without fear or favor, to a whole host of 
specific examples. Every widespread economic fallacy embraced by 
pundits, politicians, editorialists, clergy, academics is given the back of 
the hand they so richly deserve by this author: that public works pro- 
mote economic welfare, that unions and union-inspired minimum 

Introduction ix 

wage laws actually raise wages, that free trade creates unemployment, 
that rent control helps house the poor, that saving hurts the economy, 
that profits exploit the poverty stricken, the list goes on and on. Exhil- 
arating. No one who digests this book will ever be the same when it 
comes to public policy analysis. 

I cannot leave this Introduction without mentioning two favorite 
passages of mine. In chapter 3, “The Blessings of Destruction,” 
Ha 2 litt applies the lesson of the broken-window fallacy (who can ever 
forget the hoodlum who throws a brick through the bakery window?) 
to mass devastation, such as the bombing of cities. How is this for a 
gem?: “It was merely our old friend, the broken-window fallacy, in 
new clothing, and grown fat beyond recognition.” Did Germany and 
Japan really prosper after World War II because of the bombing 
inflicted upon them? They had new factories, built to replace those 
that were destroyed, while the victorious U.S. had only middle-aged 
and old factories. Well, if this were all it takes to achieve prosperity, 
says Ha 2 litt, we can always bomb our own industrial facilities. 

And here is my all-time favorite. Says Ha 2 litt in chapter 7, “The 
Curse of Machinery,” “Mrs. Eleanor Roosevelt . . . wrote: ‘We have 
reached a point today where labor-saving devices are good only when 
they do not throw the worker out of his job’.” Our author gets right to 
the essence of this fallacy: “Why should freight be carried from 
Chicago to New York by railroad when we could employ enormously 
more men, for example, to carry it all on their backs?” No, in this direc- 
tion lies rabid Ludditism, where all machinery is consigned to the dust 
bin of the economy, and mankind is relegated to a stone-age existence. 

What of Ha 2 litt the man? He was born in 1894, and had a top 
notch education, so long as his parents could afford it. He had to leave 
school. A voracious reader, he learned more and accomplished more 
than most professional academics. But he remained uncredentialed. 
No university ever awarded him its Ph.D. degree in economics. Ha 2 litt 
was all but fro 2 en out of higher education. Apart from a few Austro- 
libertarian professors who assigned his books such as this one, to their 
classes, he was ignored by the academic mainstream. 

x Economics in One Lesson 

When it came to publishing and writing, Ha 2 litt was a veritable 
machine. His total bibliography contains more than 10,000 entries. 
That is not a misprint. (As you can see, those who relish Economics in 
One Lesson will have a lot of pleasant reading in front of them.) He was 
at it from the earliest age, initially making his way in New York by 
working for financial dailies. Ha 2 litt made his public reputation as lit- 
erary editor for The Nation in 1930. He was interested in economics but 
not particularly political. 

The New Deal changed all that. He objected to the regimentation 
imposed by the regime. The Nation debated the issue and decided to 
endorse FDR and all his works. Ha 2 litt had to go. His next job: H.L. 
Mencken’s successor at the American Mercury. Some of the best anti- 
New Deal writing of the period was by none other than our man. By 
1940 he had vaulted to position of editorial writer at The New York 
Times, where he wrote an article or two every day, most of them 
unsigned. Then he met Ludwig von Mises and his Austrian period 
began. Writing for the paper, he reviewed all the important Austrian 
books and gave them a prominence they wouldn’t have otherwise had. 
It was at the end of his tenure there that he wrote this book — just 
before coming to blows with management over the wisdom of Bret- 
ton Woods, and leaving for Newsweek, where he wrote wonderful edi- 
torials, while contributing to every venue that would publish him. He 
died in 1993. 

In summary, I feel like a party host introducing two guests to one 
another, who hopes they will like each other. I hope you will like this 
book. But more, I hope it will affect your life in somewhat the same 
way it has mine. It has inspired me to promote economic freedom. 
Indeed, to never shut up about it. It has convinced me that free mar- 
ket economics is as beautiful, in its way, as is a prism, a diamond, a 
sunset, the smile of a baby. We’re talking the verbal equivalent of a 
Mo 2 art or a Bach here. This book lit up my life, and I hope you get 
something, a lot from it, too. 

Walter Block 
August 2007 

Preface to the First Edition 

T his book is an analysis of economic fallacies that are at last so 
prevalent that they have almost become a new orthodoxy. The 
one thing that has prevented this has been their own self-contradic- 
tions, which have scattered those who accept the same premises into 
a hundred different “schools,” for the simple reason that it is impos- 
sible in matters touching practical life to be consistendy wrong. But 
the difference between one new school and another is merely that one 
group wakes up earlier than another to the absurdities to which its 
false premises are driving it, and becomes at that moment inconsistent 
by either unwittingly abandoning its false premises or accepting con- 
clusions from them less disturbing or fantastic than those that logic 
would demand. 

There is not a major government in the world at this moment, 
however, whose economic policies are not influenced, if they are not 
almost wholly determined, by acceptance of some of these fallacies. 
Perhaps the shortest and surest way to an understanding of econom- 
ics is through a dissection of such errors, and particularly of the cen- 
tral error from which they stem. That is the assumption of this vol- 
ume and of its somewhat ambitious and belligerent title. 

The volume is therefore primarily one of exposition. It makes no 
claim to originality with regard to any of the chief ideas that it 
expounds. Rather its effort is to show that many of the ideas which 


xii Economics in One Lesson 

now pass for brilliant innovations and advances are in fact mere 
revivals of ancient errors, and a further proof of the dictum that 
those who are ignorant of the past are condemned to repeat it. 

The present essay itself is, I suppose, unblushingly “classical,” 
“traditional,” and “orthodox”: at least these are the epithets with 
which those whose sophisms are here subjected to analysis will no 
doubt attempt to dismiss it. But the student whose aim is to attain as 
much truth as possible will not be frightened by such adjectives. He 
will not be forever seeking a revolution, a “fresh start,” in economic 
thought. His mind will, of course, be as recepdve to new ideas as to 
old ones; but he will be content to put aside merely resdess or exhibb 
tionistic straining for novelty and originality. As Morris R. Cohen has 
remarked: “The notion that we can dismiss the views of all previous 
thinkers surely leaves no basis for the hope that our own work will 
prove of any value to others .” 1 

Because this is a work of exposition I have availed myself freely 
and without detailed acknowledgment (except for rare footnotes and 
quotations) of the ideas of others. This is inevitable when one writes 
in a field in which many of the world’s finest minds have labored. But 
my indebtedness to at least three writers is of so specific a nature that 
I cannot allow it to pass unmentioned. My greatest debt, with respect 
to the kind of expository framework on which the present argument 
is hung, is to Frederic Bastiat’s essay Ce qu’on voit et ce qu’on ne voit fas, 
now nearly a century old. The present work may, in fact, be regarded 
as a modernization, extension, and generalization of the approach 
found in Bastiat’s pamphlet. My second debt is to Philip Wicksteed: in 
particular the chapters on wages and the final summary chapter owe 
much to Iris Commonsense of Political Economy. My third debt is to Ludwig 
von Mises. Passing over everything that this elementary treatise may 
owe to his writings in general, my most specific debt is to his exposi- 
tion of the manner in which the process of monetary inflation is 

Reason and Nature (New York: Harcourt, Brace & Co., 1931), p. x. 

Preface xiii 

When analyzing fallacies, I have thought it still less advisable to men- 
tion particular names than in giving credit. To do so would have 
required special justice to each writer criticized, with exact quotations, 
account taken of the particular emphasis he places on this point or that, 
the qualifications he makes, his personal ambiguities, inconsistencies, 
and so on. I hope, therefore, that no one will be too disappointed at the 
absence of such names as Karl Marx, Thorstein Veblen, Major Douglas, 
Lord Keynes, Professor Alvin Hansen and others in these pages. The 
object of this book is not to expose the special errors of particular writ- 
ers, but economic errors in their most frequent, widespread, or influen- 
tial form. Fallacies, when they have reached the popular stage, become 
anonymous anyway. The subdeties or obscurities to be found in the 
authors most responsible for propagating them are washed off. A doc- 
trine becomes simplified; the sophism that may have been buried in a 
network of qualifications, ambiguities, or mathematical equations 
stands clear. I hope I shall not be accused of injustice on the ground, 
therefore, that a fashionable doctrine in the form in which I have pre- 
sented it is not precisely the doctrine as it has been formulated by Lord 
Keynes or some other special author. It is the beliefs which politically 
influential groups hold and which governments act upon that we are 
interested in here, not the historical origins of those beliefs. 

I hope, finally, that I shall be forgiven for making such rare refer- 
ence to statistics in the following pages. To have tried to present sta- 
tistical confirmation, in referring to the effects of tariffs, price-fixing, 
inflation, and the controls over such commodities as coal, rubber, and 
cotton, would have swollen this book much beyond the dimensions 
contemplated. As a working newspaper man, moreover, I am acutely 
aware of how quickly statistics become out-of-date and are super- 
seded by later figures. Those who are interested in specific economic 
problems are advised to read current “realistic” discussions of them, 
with statistical documentation: they will not find it difficult to inter- 
pret the statistics correcdy in the light of the basic principles they have 

I have tried to write this book as simply and with as much freedom 
from technicalities as is consistent with reasonable accuracy, so that it can 

xiv Economics in One Lesson 

be fully understood by a reader with no previous acquaintance with eco- 

While this book was composed as a unit, three chapters have 
already appeared as separate articles, and I wish to thank The New York 
Tims, The American Scholar, and The New Leader tor permission to reprint 
material originally published in their pages. I am grateful to Professor 
von Mises for reading the manuscript and for helpful suggestions. 
Responsibility for the opinions expressed is, of course, entirely my 

Henry Hazlitt 
New York 
March 25, 1946 

Part One: The Lesson 

Chapter 1 

The Lesson 


E conomics is haunted by more fallacies than any other study known 
to man. This is no accident. The inherent difficulties of the sub- 
ject would be great enough in any case, but they are multiplied a thou- 
sandfold by a factor that is insignificant in, say, physics, mathematics, 
or medicine — the special pleading of selfish interests. While every 
group has certain economic interests identical with those of all groups, 
every group has also, as we shall see, interests antagonistic to those of 
all other groups. While certain public policies would in the long run 
benefit everybody, other policies would benefit one group only at the 
expense of all other groups. The group that would benefit by such 
policies, having such a direct interest in them, will argue for them plau- 
sibly and persistendy. It will hire the best buyable minds to devote their 
whole time to presenting its case. And it will finally either convince the 
general public that its case is sound, or so befuddle it that clear think- 
ing on the subject becomes next to impossible. 

In addition to these endless pleadings of self-interest, there is a sec- 
ond main factor that spawns new economic fallacies every day. This is 
the persistent tendency of men to see only the immediate effects of a 
given policy, or its effects only on a special group, and to neglect to 
inquire what the long-run effects of that policy will be not only on that 


4 Economics in One Lesson 

special group but on all groups. It is the fallacy of overlooking second- 
ary consequences. 

In this lies almost the whole difference between good economics 
and bad. The bad economist sees only what immediately strikes the 
eye; the good economist also looks beyond. The bad economist sees 
only the direct consequences of a proposed course; the good econo- 
mist looks also at the longer and indirect consequences. The bad 
economist sees only what the effect of a given policy has been or will 
be on one particular group; the good economist inquires also what the 
effect of the policy will be on all groups. 

The distinction may seem obvious. The precaution of looking for 
all the consequences of a given policy to everyone may seem elemen- 
tary. Doesn’t everybody know, in his personal life, that there are all 
sorts of indulgences delightful at the moment but disastrous in the 
end? Doesn’t every little boy know that if he eats enough candy he 
will get sick? Doesn’t the fellow who gets drunk know that he will 
wake up next morning with a ghastly stomach and a horrible head? 
Doesn’t the dipsomaniac know that he is ruining his liver and short- 
ening his life? Doesn’t the Don juan know that he is letting himself 
in for every sort of risk, from blackmail to disease? Finally, to bring 
it to the economic though still personal realm, do not the idler and 
the spendthrift know, even in the midst of their glorious fling, that 
they are heading for a future of debt and poverty? 

Yet when we enter the field of public economics, these elementary 
truths are ignored. There are men regarded today as brilliant econo- 
mists, who deprecate saving and recommend squandering on a 
national scale as the way of economic salvation; and when anyone 
points to what the consequences of these policies will be in the long 
run, they reply flippantly, as might the prodigal son of a warning 
father: “In the long run we are all dead.” And such shallow wisecracks 
pass as devastating epigrams and the ripest wisdom. 

But the tragedy is that, on the contrary, we are already suffering the 
long-run consequences of the policies of the remote or recent past. 
Today is already the tomorrow which the bad economist yesterday 
urged us to ignore. The long-run consequences of some economic 

The Lesson 5 

policies may become evident in a few months. Others may not 
become evident for several years. Still others may not become evident 
for decades. But in every case those long-run consequences are con- 
tained in the policy as surely as the hen was in the egg, the flower in 
the seed. 

From this aspect, therefore, the whole of economics can be 
reduced to a single lesson, and that lesson can be reduced to a single 
sentence. The art of economics consists in looking not ?>terely at the immediate hut 
at the longer effects of any act or polity; it consists in tracing the consequences of that 
polity not merely for one group but for all groups. 


Nine-tenths of the economic fallacies that are working such dread- 
ful harm in the world today are the result of ignoring this lesson. 
Those fallacies all stem from one of two central fallacies, or both: that 
of looking only at the immediate consequences of an act or proposal, 
and that of looking at the consequences only for a particular group to 
the neglect of other groups. 

It is true, of course, that the opposite error is possible. In consid- 
ering a policy we ought not to concentrate only on its long-run results 
to the community as a whole. This is the error often made by the clas- 
sical economists. It resulted in a certain callousness toward the fate of 
groups that were immediately hurt by policies or developments which 
proved to be beneficial on net balance and in the long run. 

But comparatively few people today make this error; and those few 
consist mainly of professional economists. The most frequent fallacy 
by far today, the fallacy that emerges again and again in nearly every 
conversation that touches on economic affairs, the error of a thou- 
sand political speeches, the central sophism of the “new” economics, 
is to concentrate on the short-run effects of policies on special groups 
and to ignore or belitde the long-run effects on the community as a 
whole. The “new” economists flatter themselves that this is a great, 
almost a revolutionary advance over the methods of the “classical” or 
“orthodox” economists, because the former take into consideration 
short-run effects which the latter often ignored. But in themselves 

6 Economics in One Lesson 

ignoring or slighting the long-run effects, they are making the far 
more serious error. They overlook the woods in their precise and 
minute examination of particular trees. Their methods and conclu- 
sions are often profoundly reactionary. They are sometimes surprised 
to find themselves in accord with seventeenth-century mercantilism. 
They fall, in fact, into all the ancient errors (or would, if they were not 
so inconsistent) that the classical economists, we had hoped, had once 
for all got rid of. 


It is often sadly remarked that the bad economists present their 
errors to the public better than the good economists present their 
truths. It is often complained that demagogues can be more plausi- 
ble in putting forward economic nonsense from the platform than the 
honest men who try to show what is wrong with it. But the basic rea- 
son for this ought not to be mysterious. The reason is that the dema- 
gogues and bad economists are presenting half-truths. They are speak- 
ing only of the immediate effect of a proposed policy or its effect 
upon a single group. As far as they go they may often be right. In these 
cases the answer consists in showing that the proposed policy would 
also have longer and less desirable effects, or that it could benefit one 
group only at the expense of all other groups. The answer consists in 
supplementing and correcting the half-truth with the other half. But to 
consider all the chief effects of a proposed course on everybody often 
requires a long, complicated, and dull chain of reasoning. Most of the 
audience finds this chain of reasoning difficult to follow and soon 
becomes bored and inattentive. The bad economists rationalize this 
intellectual debility and laziness by assuring the audience that it need 
not even attempt to follow the reasoning or judge it on its merits 
because it is only “classicism” or “laissez-faire,” or “capitalist apologet- 
ics” or whatever other term of abuse may happen to strike them as 

We have stated the nature of the lesson, and of the fallacies that 
stand in its way, in abstract terms. But the lesson will not be driven 
home, and the fallacies will continue to go unrecognized, unless both 

The Lesson 7 

are illustrated by examples. Through these examples we can move 
from the most elementary problems in economics to the most com- 
plex and difficult. Through them we can learn to detect and avoid first 
the crudest and most palpable fallacies and finally some of the most 
sophisticated and elusive. To that task we shall now proceed. 

Part Two: The Lesson Applied 

Chapter 2 

The Broken Window 

L et us begin with the simplest illustration possible: let us, emulat- 
ing Bastiat, choose a broken pane of glass. 

A young hoodlum, say, heaves a brick through the window of a 
baker’s shop. The shopkeeper runs out furious, but the boy is gone. A 
crowd gathers, and begins to stare with quiet satisfaction at the gaping 
hole in the window and the shattered glass over the bread and pies. 
After a while the crowd feels the need for philosophic reflection. And 
several of its members are almost certain to remind each other or the 
baker that, after all, the misfortune has its bright side. It will make 
business for some glazier. As they begin to think of this they elabo- 
rate upon it. How much does a new plate glass window cost? Fifty dol- 
lars? That will be quite a sum. After all, if windows were never bro- 
ken, what would happen to the glass business? Then, of course, the 
thing is endless. The glazier will have $50 more to spend with other 
merchants, and these in turn will have $50 more to spend with still 
other merchants, and so ad infinitum. The smashed window will go on 
providing money and employment in ever-widening circles. The logi- 
cal conclusion from all this would be, if the crowd drew it, that the lit- 
tle hoodlum who threw the brick, far from being a public menace, was 
a public benefactor. 


12 Economics in One Lesson 

Now let us take another look. The crowd is at least right in its first 
conclusion. This little act of vandalism will in the first instance mean 
more business for some gla 2 ier. The gla 2 ier will be no more unhappy 
to learn of the incident than an undertaker to learn of a death. But 
the shopkeeper will be out $50 that he was planning to spend for a 
new suit. Because he has had to replace a window, he will have to go 
without the suit (or some equivalent need or luxury). Instead of hav- 
ing a window and $50 he now has merely a window. Or, as he was 
planning to buy the suit that very afternoon, instead of having both a 
window and a suit he must be content with the window and no suit. 
If we think of him as a part of the community, the community has 
lost a new suit that might otherwise have come into being, and is just 
that much poorer. 

The gla 2 ier’s gain of business, in short, is merely the tailor’s loss of 
business. No new “employment” has been added. The people in the 
crowd were thinking only of two parties to the transaction, the baker 
and the gla 2 ier. They had forgotten the potential third party involved, 
the tailor. They forgot him precisely because he will not now enter the 
scene. They will see the new window in the next day or two. They will 
never see the extra suit, precisely because it will never be made. They 
see only what is immediately visible to the eye. 

Chapter 3 

The Blessings of Destruction 

S o we have finished with the broken window An elementary fallacy. 

Anybody, one would think, would be able to avoid it after a few 
moments’ thought. Yet the broken-window fallacy, under a hundred 
disguises, is the most persistent in the history of economics. It is more 
rampant now than at any time in the past. It is solemnly reaffirmed 
every day by great captains of industry, by chambers of commerce, by 
labor union leaders, by editorial writers and newspaper columnists and 
radio commentators, by learned statisticians using the most refined 
techniques, by professors of economics in our best universities. In 
their various ways they all dilate upon the advantages of destruction. 

Though some of them would disdain to say that there are net ben- 
efits in small acts of destruction, they see almost endless benefits in 
enormous acts of destruction. They tell us how much better off eco- 
nomically we all are in war than in peace. They see “miracles of produc- 
tion” which it requires a war to achieve. And they see a postwar world 
made certainly prosperous by an enormous “accumulated” or “backed- 
up” demand. In Europe they joyously count the houses, the whole cities 
that have been leveled to the ground and that “will have to be replaced.” 
In America they count the houses that could not be built during the war, 
the nylon stockings that could not be supplied, the worn-out automo- 
biles and tires, the obsolescent radios and refrigerators. They bring 
together formidable totals. 


14 Economics in One Lesson 

It is merely our old friend, the broken-window fallacy, in new 
clothing, and grown fat beyond recognition. This time it is supported 
by a whole bundle of related fallacies. It confuses need with demand. 
The more war destroys, the more it impoverishes, the greater is the 
postwar need. Indubitably. But need is not demand. Effective eco- 
nomic demand requires not merely need but corresponding purchas- 
ing power. The needs of China today are incomparably greater than 
the needs of America. But its purchasing power, and therefore the 
“new business” that it can stimulate, are incomparably smaller. 

But if we get past this point, there is a chance for another fallacy, 
and the broken-windowites usually grab it. They think of “purchasing 
power” merely in terms of money. Now money can be run off by the 
printing press. As this is being written, in fact, printing money is the 
world’s biggest industry — if the product is measured in monetary 
terms. But the more money is turned out in this way, the more the 
value of any given unit of money falls. This falling value can be meas- 
ured in rising prices of commodities. But as most people are so firmly 
in the habit of thinking of their wealth and income in terms of money, 
they consider themselves better off as these monetary totals rise, in 
spite of the fact that in terms of things they may have less and buy less. 
Most of the “good” economic results which people attribute to war are 
really owing to wartime inflation. They could be produced just as well 
by an equivalent peacetime inflation. We shall come back to this money 
illusion later. 

Now there is a half-truth in the “backed-up” demand fallacy, just 
as there was in the broken-window fallacy. The broken window did 
make more business for the gla 2 ier. The destruction of war will make 
more business for the producers of certain things. The destruction of 
houses and cities will make more business for the building and con- 
struction industries. The inability to produce automobiles, radios, and 
refrigerators during the war will bring about a cumulative postwar 
demand for those particular products. 

To most people this will seem like an increase in total demand, as 
it may well be in terms of dollars of lower purchasingpower. But what really takes 
place is a diversion of demand to these particular products from others. 
The people of Europe will build more new houses than otherwise 

The Blessings of Destruction 1 5 

because they must. But when they build more houses they will have 
just that much less manpower and productive capacity left over for 
everything else. When they buy houses they will have just that much 
less purchasing power for everything else. Wherever business is 
increased in one direction, it must (except insofar as productive ener- 
gies may be generally stimulated by a sense of want and urgency) be 
correspondingly reduced in another. 

The war, in short, will change the postwar direction of effort; it will 
change the balance of industries; it will change the structure of indus- 
try. And this in time will also have its consequences. There will be 
another distribution of demand when accumulated needs for houses 
and other durable goods have been made up. Then these temporarily 
favored industries will, relatively, have to shrink again, to allow other 
industries filling other needs to grow. 

It is important to keep in mind, finally, that there will not merely 
be a difference in the pattern of postwar as compared with pre-war 
demand. Demand will not merely be diverted from one commodity to 
another. In most countries it will shrink in total amount. 

This is inevitable when we consider that demand and supply are 
merely two sides of the same coin. They are the same thing looked at 
from different directions. Supply creates demand because at bottom it 
is demand. The supply of the thing they make is all that people have, 
in fact, to offer in exchange for the things they want. In this sense the 
farmers’ supply of wheat constitutes their demand for automobiles 
and other goods. The supply of motor cars constitutes the demand of 
the people in the automobile industry for wheat and other goods. All 
this is inherent in the modern division of labor and in an exchange 

This fundamental fact, it is true, is obscured for most people 
(including some reputedly brilliant economists) through such compli- 
cations as wage payments and the indirect form in which virtually all 
modern exchanges are made through the medium of money. John 
Stuart Mill and other classical writers, though they sometimes failed to 
take sufficient account of the complex consequences resulting from 
the use of money, at least saw through the monetary veil to the under- 
lying realities. To that extent they were in advance of many of their 

1 6 Economics in One Lesson 

present-day critics, who are befuddled by money rather than 
instructed by it. Mere inflation — that is, the mere issuance of more 
money, with the consequence of higher wages and prices — may look 
like the creation of more demand. But in terms of the actual produc- 
tion and exchange of real things it is not. Yet a fall in postwar demand 
may be concealed from many people by the illusions caused by higher 
money wages that are more than offset by higher prices. 

Postwar demand in most countries, to repeat, will shrink in absolute 
amount as compared with pre-war demand because postwar supply 
will have shrunk. This should be obvious enough in Germany and 
Japan, where scores of great cities were leveled to the ground. The 
point, in short, is plain enough when we make the case extreme 
enough. If England, instead of being hurt only to the extent she was 
by her participation in the war, had had all her great cities destroyed, all 
her factories destroyed and almost all her accumulated capital and con- 
sumer goods destroyed, so that her people had been reduced to the 
economic level of the Chinese, few people would be talking about the 
great accumulated and backed-up demand caused by the war. It would 
be obvious that buying power had been wiped out to the same extent 
that productive power had been wiped out. A runaway monetary infla- 
tion, lifting prices a thousandfold, might nonetheless make the 
“national income” figures in monetary terms higher than before the 
war. But those who would be deceived by that into imagining them- 
selves richer than before the war would be beyond the reach of rational 
argument. Yet the same principles apply to a small war destruction as 
to an overwhelming one. 

There may be, it is true, offsetting factors. Technological discover- 
ies and advances during the war, for example, may increase individual 
or national productivity at this point or that. The destruction of war 
will, it is true, divert postwar demand from some channels into others. 
And a certain number of people may continue to be deceived indefi- 
nitely regarding their real economic welfare by rising wages and prices 
caused by an excess of printed money. But the belief that a genuine 
prosperity can be brought about by a “replacement demand” for 
things destroyed or not made during the war is nonetheless a palpable 

Chapter 4 

Public Works Mean Taxes 


T here is no more persistent and influential faith in the world today 
than the faith in government spending. Everywhere government 
spending is presented as a panacea for all our economic ills. Is private 
industry partially stagnant? We can fix it all by government spending. 
Is there unemployment? That is obviously due to “insufficient private 
purchasing power.” The remedy is just as obvious. All that is neces- 
sary is for the government to spend enough to make up the “defi- 

An enormous literature is based on this fallacy, and, as so often 
happens with doctrines of this sort, it has become part of an intricate 
network of fallacies that mutually support each other. We cannot 
explore that whole network at this point; we shall return to other 
branches of it later. But we can examine here the mother fallacy that 
has given birth to this progeny, the main stem of the network. 

Everything we get, outside of the free gifts of nature, must in some 
way be paid for. The world is full of so-called economists who in turn 
are full of schemes for getting something for nothing. They tell us that 
the government can spend and spend without taxing at all; that it can 
continue to pile up debt without ever paying it off, because “we owe it 
to ourselves.” We shall return to such extraordinary doctrines at a later 


1 8 Economics in One Lesson 

point. Here I am afraid that we shall have to be dogmatic, and point out 
that such pleasant dreams in the past have always been shattered by 
national insolvency or a runaway inflation. Here we shall have to say 
simply that all government expenditures must eventually be paid out of 
the proceeds of taxation; that to put off the evil day merely increases 
the problem, and that inflation itself is merely a form, and a particularly 
vicious form, of taxation. 

Having put aside for later consideration the network of fallacies 
which rest on chronic government borrowing and inflation, we shall 
take it for granted throughout the present chapter that either immedi- 
ately or ultimately every dollar of government spending must be 
raised through a dollar of taxation. Once we look at the matter in this 
way, the supposed miracles of government spending will appear in 
another light. 

A certain amount of public spending is necessary to perform 
essential government functions. A certain amount of public works — 
of streets and roads and bridges and tunnels, of armories and navy 
yards, of buildings to house legislatures, police, and fire depart- 
ments — is necessary to supply essential public services. With such 
public works, necessary for their own sake, and defended on that 
ground alone, I am not here concerned. I am here concerned with 
public works considered as a means of “providing employment” or of 
adding wealth to the community that it would not otherwise have had. 

A bridge is built. If it is built to meet an insistent public demand, if 
it solves a traffic problem or a transportation problem otherwise insol- 
uble, if, in short, it is even more necessary than the things for which the 
taxpayers would have spent their money if it had not been taxed away 
from them, there can be no objection. But a bridge built primarily “to 
provide employment” is a different kind of bridge. When providing 
employment becomes the end, need becomes a subordinate considera- 
tion. “Projects” have to be invented. Instead of thinking only where 
bridges must be built, the government spenders begin to ask themselves 
where bridges can be built. Can they think of plausible reasons why an 
additional bridge should connect Easton and Weston? It soon becomes 

Public Works Mean Taxes 1 9 

absolutely essential. Those who doubt the necessity are dismissed as 
obstructionists and reactionaries. 

Two arguments are put forward for the bridge, one of which is 
mainly heard before it is built, the other of which is mainly heard after 
it has been completed. The first argument is that it will provide 
employment. It will provide, say, 500 jobs for a year. The implication 
is that these are jobs that would not otherwise have come into exis- 

This is what is immediately seen. But if we have trained ourselves 
to look beyond immediate to secondary consequences, and beyond 
those who are directiy benefited by a government project to others 
who are indirectiy affected, a different picture presents itself. It is true 
that a particular group of bridgeworkers may receive more employ- 
ment than otherwise. But the bridge has to be paid for out of taxes. 
For every dollar that is spent on the bridge a dollar will be taken away 
from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose 
$1,000,000. They will have that much taken away from them which 
they would otherwise have spent on the things they needed most. 

Therefore for every public job created by the bridge project a pri- 
vate job has been destroyed somewhere else. We can see the men 
employed on the bridge. We can watch them at work. The employ- 
ment argument of the government spenders becomes vivid, and 
probably for most people convincing. But there are other things that 
we do not see, because, alas, they have never been permitted to come 
into existence. They are the jobs destroyed by the $1,000,000 taken 
from the taxpayers. All that has happened, at best, is that there has 
been a diversion of jobs because of the project. More bridge builders; 
fewer automobile workers, radio technicians, clothing workers, farm- 

But then we come to the second argument. The bridge exists. It is, 
let us suppose, a beautiful and not an ugly bridge. It has come into being 
through the magic of government spending. Where would it have been 
if the obstructionists and the reactionaries had had their way? There 
would have been no bridge. The country would have been just that 
much poorer. 

20 Economics in One Lesson 

Here again the government spenders have the better of the argu- 
ment with all those who cannot see beyond the immediate range of 
their physical eyes. They can see the bridge. But if they have taught 
themselves to look for indirect as well as direct consequences they can 
once more see in the eye of imagination the possibilities that have 
never been allowed to come into existence. They can see the unbuilt 
homes, the unmade cars and radios, the unmade dresses and coats, per- 
haps the unsold and ungrown foodstuffs. To see these uncreated things 
requires a kind of imagination that not many people have. We can 
think of these nonexistent objects once, perhaps, but we cannot keep 
them before our minds as we can the bridge that we pass every work- 
ing day. What has happened is merely that one thing has been created 
instead of others. 


The same reasoning applies, of course, to every other form of 
public work. It applies just as well, for example, to the erection with 
public funds of housing for people of low incomes. All that happens 
is that money is taken away through taxes from families of higher 
income (and perhaps a litde from families of even lower income) to 
force them to subsidke these selected families with low incomes and 
enable them to live in better housing for the same rent or for lower 
rent than previously. 

I do not intend to enter here into all the pros and cons of public 
housing. I am concerned only to point out the error in two of the argu- 
ments most frequendy put forward in favor of public housing. One is 
the argument that it “creates employment;” the other that it creates 
wealth which would not otherwise have been produced. Both of these 
arguments are false, because they overlook what is lost through taxa- 
tion. Taxation for public housing destroys as many jobs in other lines as 
it creates in housing. It also results in unbuilt private homes, in unmade 
washing machines and refrigerators, and in lack of innumerable other 
commodities and services. 

And none of this is answered by the sort of reply which points 
out, for example, that public housing does not have to be financed by 

Public Works Mean Taxes 21 

a lump sum capital appropriation, but merely by annual rent subsidies. 
This simply means that the cost is spread over many years instead of 
being concentrated in one. It also means that what is taken from the 
taxpayers is spread over many years instead of being concentrated 
into one. Such technicalities are irrelevant to the main point. 

The great psychological advantage of the public housing advocates 
is that men are seen at work on the houses when they are going up, and 
the houses are seen when they are finished. People live in them, and 
proudly show their friends through the rooms. The jobs destroyed by 
the taxes for the housing are not seen, nor are the goods and services 
that were never made. It takes a concentrated effort of thought, and a 
new effort each time the houses and the happy people in them are seen, 
to think of the wealth that was not created instead. Is it surprising that 
the champions of public housing should dismiss this, if it is brought to 
their attention, as a world of imagination, as the objections of pure the- 
ory, while they point to the public housing that exists? As a character in 
Bernard Shaw’s Saint Joan replies when told of the theory of Pythagoras 
that the earth is round and revolves around the sun: “What an utter 
fool! Couldn’t he use his eyes?” 

We must apply the same reasoning, once more, to great projects 
like the Tennessee Valley Authority. Here, because of sheer size, the 
danger of optical illusion is greater than ever. Here is a mighty dam, 
a stupendous arc of steel and concrete, “greater than anything that 
private capital could have built,” the fetish of photographers, the 
heaven of socialists, the most often used symbol of the miracles of 
public construction, ownership, and operation. Here are mighty gen- 
erators and power houses. Here is a whole region lifted to a higher 
economic level, attracting factories and industries that could not oth- 
erwise have existed. And it is all presented, in the panegyrics of its 
partisans, as a net economic gain without offsets. 

We need not go here into the merits of the TVA or public projects 
like it. But this time we need a special effort of the imagination, which 
few people seem able to make, to look at the debit side of the ledger. 
If taxes are taken from people and corporations, and spent in one par- 
ticular section of the country, why should it cause surprise, why 

22 Economics in One Lesson 

should it be regarded as a miracle, if that section becomes compara- 
tively richer? Other secdons of the country, we should remember, are 
then comparatively poorer. The thing so great that “private capital 
could not have built it” has in fact been built by private capital — the 
capital that was expropriated in taxes (or, if the money was borrowed, 
that eventually must be expropriated in taxes). Again we must make an 
effort of the imagination to see the private power plants, the private 
homes, the typewriters and radios that were never allowed to come 
into existence because of the money that was taken from people all 
over the country to build the photogenic Norris Dam. 


I have deliberately chosen the most favorable examples of public 
spending schemes — that is, those that are most frequently and fer- 
vently urged by the government spenders and most highly regarded by 
the public. I have not spoken of the hundreds of boondoggling proj- 
ects that are invariably embarked upon the moment the main object is 
to “give jobs” and “to put people to work.” For then the usefulness of 
the project itself, as we have seen, inevitably becomes a subordinate 
consideration. Moreover, the more wasteful the work, the more costly 
in manpower, the better it becomes for the purpose of providing 
more employment. Under such circumstances it is highly improbable 
that the projects thought up by the bureaucrats will provide the same 
net addition to wealth and welfare, per dollar expended, as would have 
been provided by the taxpayers themselves, if they had been individ- 
ually permitted to buy or have made what they themselves wanted, 
instead of being forced to surrender part of their earnings to the state. 

Chapter 5 

Taxes Discourage Production 

T here is a still further factor which makes it improbable that the 
wealth created by government spending will fully compensate for 
the wealth destroyed by the taxes imposed to pay for that spending. It 
is not a simple question, as so often supposed, of taking something out 
of the nation’s right-hand pocket to put into its left-hand pocket. The 
government spenders tell us, for example, that if the national income 
is $200,000,000,000 (they are always generous in fixing this figure) then 
government taxes of $50,000,000,000 a year would mean that only 25 
percent of the national income was being transferred from private pur- 
poses to public purposes. This is to talk as if the country were the same 
sort of unit of pooled resources as a huge corporation, and as if all 
that were involved were a mere bookkeeping transaction. The govern- 
ment spenders forget that they are taking the money from A in order 
to pay it to B. Or rather, they know this very well; but while they dilate 
upon all the benefits of the process to B, and all the wonderful things 
he will have which he would not have had if the money had not been 
transferred to him, they forget the effects of the transaction on A. B is 
seen; A is forgotten. 

In our modern world there is never the same percentage of 
income tax levied on everybody. The great burden of income taxes is 
imposed on a minor percentage of the nation’s income; and these 
income taxes have to be supplemented by taxes of other kinds. These 


24 Economics in One Lesson 

taxes inevitably affect the actions and incentives of those from whom 
they are taken. When a corporation loses 1 00 cents of every dollar it 
loses, and is permitted to keep only 60 cents of every dollar it gains, 
and when it cannot offset its years of losses against its years of gains, 
or cannot do so adequately, its policies are affected. It does not 
expand its operations, or it expands only those attended with a min- 
imum of risk. People who recognize this situation are deterred from 
starting new enterprises. Thus old employers do not give more 
employment, or not as much more as they might have; and others 
decide not to become employers at all. Improved machinery and bet- 
ter-equipped factories come into existence much more slowly than 
they otherwise would. The result in the long run is that consumers 
are prevented from getting better and cheaper products, and that real 
wages are held down. 

There is a similar effect when personal incomes are taxed 50, 60, 
75, and 90 percent. People begin to ask themselves why they should 
work six, eight, or ten months of the entire year for the government, 
and only six, four, or two months for themselves and their families. If 
they lose the whole dollar when they lose, but can keep only a dime of 
it when they win, they decide that it is foolish to take risks with their 
capital. In addition, the capital available for risk taking itself shrinks 
enormously. It is being taxed away before it can be accumulated. In 
brief, capital to provide new private jobs is first prevented from com- 
ing into existence, and the part that does come into existence is then 
discouraged from starting new enterprises. The government spenders 
create the very problem of unemployment that they profess to solve. 

A certain amount of taxes is of course indispensable to carry on 
essential government functions. Reasonable taxes for this purpose 
need not hurt production much. The kind of government services 
then supplied in return, which among other things safeguard produc- 
tion itself, more than compensate for this. But the larger the percent- 
age of the national income taken by taxes the greater the deterrent to 
private production and employment. When the total tax burden grows 
beyond a bearable size, the problem of devising taxes that will not dis- 
courage and disrupt production becomes insoluble. 

Chapter 6 

Credit Diverts Production 


G overnment “encouragement” to business is sometimes as much 
to be feared as government hostility. This supposed encourage- 
ment often takes the form of a direct grant of government credit or 
a guarantee of private loans. 

The question of government credit can often be complicated, 
because it involves the possibility of inflation. We shall defer analysis 
of the effects of inflation of various kinds until a later chapter. Here, 
for the sake of simplicity, we shall assume that the credit we are dis- 
cussing is noninflationary. Inflation, as we shall later see, while it com- 
plicates the analysis, does not at bottom change the consequences of 
the policies discussed. 

The most frequent proposal of this sort in Congress is for more 
credit to farmers. In the eyes of most Congressmen the farmers sim- 
ply cannot get enough credit. The credit supplied by private mortgage 
companies, insurance companies or country banks is never “ade- 
quate.” Congress is always finding new gaps that are not filled by the 
existing lending institutions, no matter how many of these it has itself 
already brought into existence. The farmers may have enough long- 
term credit or enough short-term credit, but, it turns out, they have 
not enough “intermediate” credit; or the interest rate is too high; or 


26 Economics in One Lesson 

the complaint is that private loans are made only to rich and well- 
established farmers. So new lending institutions and new types of 
farm loans are piled on top of each other by the legislature. 

The faith in all these policies, it will be found, springs from two 
acts of shortsightedness. One is to look at the matter only from the 
standpoint of the farmers that borrow. The other is to think only of 
the first half of the transaction. 

Now all loans, in the eyes of honest borrowers, must eventually be 
repaid. All credit is debt. Proposals for an increased volume of credit, 
therefore, are merely another name for proposals for an increased 
burden of debt. They would seem considerably less inviting if they 
were habitually referred to by the second name instead of by the first. 

We need not discuss here the normal loans that are made to farm- 
ers through private sources. They consist of mortgages; of installment 
credits for the purchase of automobiles, refrigerators, radios, tractors, 
and other farm machinery, and of bank loans made to carry the 
farmer along until he is able to harvest and market his crop and get 
paid for it. Here we need concern ourselves only with loans to farmers 
either made directly by some government bureau or guaranteed by it. 

These loans are of two main types. One is a loan to enable the 
farmer to hold his crop off the market. This is an especially harmful 
type; but it will be more convenient to consider it later when we come 
to the question of government commodity controls. The other is a 
loan to provide capital — often to set the farmer up in business by 
enabling him to buy the farm itself, or a mule or tractor, or all three. 

At first glance the case for this type of loan may seem a strong one. 
Here is a poor family, it will be said, with no means of livelihood. It is 
cruel and wasteful to put them on relief. Buy a farm for them; set them 
up in business; make productive and self-respecting citizens of them; let 
them add to the total national product and pay the loan off out of what 
they produce. Or here is a farmer struggling along with primitive meth- 
ods of production because he has not the capital to buy himself a trac- 
tor. Lend him the money for one; let him increase his productivity; he 
can repay the loan out of the proceeds of his increased crops. In that 
way you not only enrich him and put him on his feet; you enrich the 

Credit Diverts Production 27 

whole community by that much added output. And the loan, concludes 
the argument, costs the government and the taxpayers less than noth- 
ing, because it is “self-liquidating.” 

Now as a matter of fact this is what happens every day under the 
institution of private credit. If a man wishes to buy a farm, and has, 
let us say, only half or a third as much money as the farm costs, a 
neighbor or a savings bank will lend him the rest in the form of a 
mortgage on the farm. If he wishes to buy a tractor, the tractor com- 
pany itself, or a finance company, will allow him to buy it for one-third 
of the purchase price with the rest to be paid off in installments out 
of earnings that the tractor itself will help to provide. 

But there is a decisive difference between the loans supplied by pri- 
vate lenders and the loans supplied by a government agency. Each pri- 
vate lender risks his own funds. (A banker, it is true, risks the funds of 
others that have been entrusted to him; but if money is lost he must 
either make good out of his own funds or be forced out of business.) 
When people risk their own funds they are usually careful in their 
investigations to determine the adequacy of the assets pledged and 
the business acumen and honesty of the borrower. 

If the government operated by the same strict standards, there 
would be no good argument for its entering the field at all. Why do 
precisely what private agencies already do? But the government 
almost invariably operates by different standards. The whole argument 
for its entering the lending business, in fact, is that it will make loans 
to people who could not get them from private lenders. This is only 
another way of saying that the government lenders will take risks with 
other people’s money (the taxpayers’) that private lenders will not take 
with their own money. Sometimes, in fact, apologists will freely 
acknowledge that the percentage of losses will be higher on these 
government loans than on private loans. But they contend that this 
will be more than offset by the added production brought into exis- 
tence by the borrowers who pay back, and even by most of the bor- 
rowers who do not pay back. 

This argument will seem plausible only as long as we concentrate 
our attention on the particular borrowers whom the government 

28 Economics in One Lesson 

supplies with funds, and overlook the people whom its plan deprives 
of funds. For what is really being lent is not money, which is merely 
the medium of exchange, but capital. (I have already put the reader on 
notice that we shall postpone to a later point the complications intro- 
duced by an inflationary expansion of credit.) What is really being 
lent, say, is the farm or the tractor itself. Now the number of farms in 
existence is limited, and so is the production of tractors (assuming, 
especially, that an economic surplus of tractors is not produced sim- 
ply at the expense of other things). The farm or tractor that is lent to 
A cannot be lent to B. The real question is, therefore, whether A or B 
shall get the farm. 

This brings us to the respective merits of A and B, and what each 
contributes, or is capable of contributing, to production. A, let us say, 
is the man who would get the farm if the government did not inter- 
vene. The local banker or his neighbors know him and know his 
record. They want to find employment for their funds. They know 
that he is a good farmer and an honest man who keeps his word. They 
consider him a good risk. He has already, perhaps, through industry, 
frugality and foresight, accumulated enough cash to pay one-fourth of 
the price of the farm. They lend him the other three-fourths; and he 
gets the farm. 

There is a strange idea abroad, held by all monetary cranks, that 
credit is something a banker gives to a man. Credit, on the contrary, is 
something a man already has. He has it, perhaps, because he already has 
marketable assets of a greater cash value than the loan for which he is 
asking. Or he has it because his character and past record have earned 
it. He brings it into the bank with him. That is why the banker makes 
him the loan. The banker is not giving something for nothing. He feels 
assured of repayment. He is merely exchanging a more liquid form of 
asset or credit for a less liquid form. Sometimes he makes a mistake, and 
then it is not only the banker who suffers, but the whole community; 
for values which were supposed to be produced by the lender are not 
produced and resources are wasted. 

Now it is to A, let us say, who has credit, that the banker would 
make his loan. But the government goes into the lending business in 

Credit Diverts Vroduction 29 

a charitable frame of mind because, as we saw, it is worried about B. 
B cannot get a mortgage or other loans from private lenders because 
he does not have credit with them. He has no savings; he has no 
impressive record as a good farmer; he is perhaps at the moment on 
relief. Why not, say the advocates of government credit, make him a 
useful and productive member of society by lending him enough for 
a farm and a mule or tractor and setting him up in business? 

Perhaps in an individual case it may work out all right. But it is obvi- 
ous that in general the people selected by these government standards 
will be poorer risks than the people selected by private standards. More 
money will be lost by loans to them. There will be a much higher per- 
centage of failures among them. They will be less efficient. More 
resources will be wasted by them. Yet the recipients of government 
credit will get their farms and tractors at the expense of what other- 
wise would have been the recipients of private credit. Because B has a 
farm, A will be deprived of a farm. A may be squeezed out either 
because interest rates have gone up as a result of the government oper- 
ations, or because farm prices have been forced up as a result of them, 
or because there is no other farm to be had in his neighborhood. In 
any case the net result of government credit has not been to increase 
the amount of wealth produced by the community but to reduce it, 
because the available real capital (consisting of actual farms, tractors, 
etc.) has been placed in the hands of the less efficient borrowers rather 
than in the hands of the more efficient and trustworthy. 


The case becomes even clearer if we turn from farming to other 
forms of business. The proposal is frequently made that the govern- 
ment ought to assume the risks that are “too great for private indus- 
try.” This means that bureaucrats should be permitted to take risks 
with the taxpayers’ money that no one is willing to take with his own. 

Such a policy would lead to evils of many different kinds. It would 
lead to favoritism: to the making of loans to friends, or in return for 
bribes. It would inevitably lead to scandals. It would lead to recrimina- 
tions whenever the taxpayers’ money was thrown away on enterprises 

30 Economics in One Lesson 

that failed. It would increase the demand for socialism: for, it would 
properly be asked, if the government is going to bear the risks, why 
should it not also get the profits? What justification could there pos- 
sibly be, in fact, for asking the taxpayers to take the risks while per- 
mitting private capitalists to keep the profits? (This is precisely, how- 
ever, as we shall later see, what we already do in the case of 
“nonrecourse” government loans to farmers.) 

But we shall pass over all these evils for the moment, and concen- 
trate on just one consequence of loans of this type. This is that they 
will waste capital and reduce production. They will throw the available 
capital into bad or at best dubious projects. They will throw it into the 
hands of persons who are less competent or less trustworthy than 
those who would otherwise have got it. For the amount of real capi- 
tal at any moment (as distinguished from monetary tokens run off on 
a printing press) is limited. What is put into the hands of B cannot be 
put into the hands of A. 

People want to invest their own capital. But they are cautious. They 
want to get it back. Most lenders, therefore, investigate any proposal 
carefully before they risk their own money in it. They weigh the 
prospect of profits against the chances of loss. They may sometimes 
make mistakes. But for several reasons they are likely to make fewer 
mistakes than government lenders. In the first place, the money is 
either their own or has been voluntarily entrusted to them. In the case 
of government lending the money is that of other people, and it has 
been taken from them, regardless of their personal wish, in taxes. The 
private money will be invested only where repayment with interest or 
profit is definitely expected. This is a sign that the persons to whom 
the money has been lent will be expected to produce things for the 
market that people actually want. The government money, on the 
other hand, is likely to be lent for some vague general purpose like 
“creating employment;” and the more inefficient the work — that is, 
the greater the volume of employment it requires in relation to the 
value of product — the more highly thought of the investment is likely 
to be. 

Credit Diverts Vroduction 31 

The private lenders, moreover, are selected by a cruel market test. 
If they make bad mistakes they lose their money and have no more 
money to lend. It is only if they have been successful in the past that 
they have more money to lend in the future. Thus private lenders 
(except the relatively small proportion that have got their funds 
through inheritance) are rigidly selected by a process of survival of 
the fittest. The government lenders, on the other hand, are either 
those who have passed civil service examinations, and know how to 
answer hypothetical questions hypothetically, or they are those who 
can give the most plausible reasons for making loans and the most 
plausible explanations of why it wasn’t their fault that the loans failed. 
But the net result remains: private loans will utilize existing resources 
and capital far better than government loans. Government loans will 
waste far more capital and resources than private loans. Government 
loans, in short, as compared with private loans, will reduce produc- 
tion, not increase it. 

The proposal for government loans to private individuals or proj- 
ects, in brief, sees B and forgets A. It sees the people in whose hands 
the capital is put; it forgets those who would otherwise have had it. It 
sees the project to which capital is granted; it forgets the projects from 
which capital is thereby withheld. It sees the immediate benefit to one 
group; it overlooks the losses to other groups, and the net loss to the 
community as a whole. 

It is one more illustration of the fallacy of seeing only a special 
interest in the short run and forgetting the general interest in the long 


We remarked at the beginning of this chapter that government “aid” 
to business is sometimes as much to be feared as government hostility. 
This applies as much to government subsidies as to government loans. 
The government never lends or gives anything to business that it does 
not take away from business. One often hears New Dealers and other 
statists boast about the way government “baled business out” with 
the Reconstruction Finance Corporation, the Home Owners Loan 

32 "Economics in One Lesson 

Corporation, and other government agencies in 1932 and later. But the 
government can give no financial help to business that it does not first 
or finally take from business. The government’s funds all come from 
taxes. Even the much vaunted “government credit” rests on the 
assumption that its loans will ultimately be repaid out of the proceeds 
of taxes. When the government makes loans or subsidies to business, 
what it does is to tax successful private business in order to support 
unsuccessful private business. Under certain emergency circumstances 
there may be a plausible argument for this, the merits of which we need 
not examine here. But in the long run it does not sound like a paying 
proposition from the standpoint of the country as a whole. And expe- 
rience has shown that it isn’t. 

Chapter 7 

The Curse of Machinery 


A mong the most viable of all economic delusions is the belief that 
machines on net balance create unemployment. Destroyed a 
thousand times, it has risen a thousand times out of its own ashes as 
hardy and vigorous as ever. Whenever there is long-continued mass 
unemployment, machines get the blame anew. This fallacy is still the 
basis of many labor union practices. The public tolerates these prac- 
tices because it either believes at bottom that the unions are right, or 
is too confused to see just why they are wrong. 

The belief that machines cause unemployment, when held with 
any logical consistency, leads to preposterous conclusions. Not only 
must we be causing unemployment with every technological improve- 
ment we make today, but primitive man must have started causing it 
with the first efforts he made to save himself from needless toil and 

To go no further back, let us turn to Adam Smith’s The Wealth of 
Nations, published in 1776. The first chapter of this remarkable book is 
called “Of the Division of Labor,” and on the second page of this first 
chapter the author tells us that a workman unacquainted with the use of 
machinery employed in pin making “could scarce make one pin a day, 
and certainly could not make twenty,” but that with the use of this 


34 Economics in One Lesson 

machinery he can make 4,800 pins a day. So already, alas, in Adam 
Smith’s time, machinery had thrown from 240 to 4,800 pin makers out 
of work for every one it kept. In the pin-making industry there was 
already, if machines merely throw men out of jobs, 99.98 percent unem- 
ployment. Could things be blacker? 

Things could be blacker, for the Industrial Revolution was just in 
its infancy. Let us look at some of the incidents and aspects of that 
revolution. Let us see, for example, what happened in the stocking 
industry. New stocking frames as they were introduced were destroyed 
by the handicraft workmen (over 1,000 in a single riot), houses were 
burned, the inventors were threatened and obliged to fly for their 
lives, and order was not finally restored until the military had been 
called out and the leading rioters had been either transported or 

Now it is important to bear in mind that insofar as the rioters were 
thinking of their own immediate or even longer futures their opposi- 
tion to the machine was rational. For William Felkin, in his History of the 
Machine-Wrought Hosiery Manufactures (1867), tells us that the larger part of 
the 50,000 English stocking knitters and their families did not fully 
emerge from the hunger and misery entailed by the introduction of the 
machine for the next forty years. But in so far as the rioters believed, 
as most of them undoubtedly did, that the machine was permanently 
displacing men, they were mistaken, for before the end of the nine- 
teenth century the stocking industry was employing at least 100 men 
for every man it employed at the beginning of the century. 

Arkwright invented his cotton- spinning machinery in 1760. At 
that time it was estimated that there were in England 5,200 spinners 
using spinning wheels, and 2,700 weavers — in all, 7,900 persons 
engaged in the production of cotton textiles. The introduction of 
Arkwright’s invention was opposed on the ground that it threatened 
the livelihood of the workers, and the opposition had to be put down 
by force. Yet in 1787 — twenty-seven years after the invention 
appeared — a parliamentary inquiry showed that the number of per- 
sons actually engaged in the spinning and weaving of cotton had 
risen from 7,900 to 320,000, an increase of 4,400 percent. 

The Curse of Machinery 35 

If the reader will consult such a book as Recent Economic Changes, by 
David A. Wells, published in 1889, he will find passages that, except for 
the dates and absolute amounts involved, might have been written by 
our technophobes (if I may coin a needed word) of today. Let me 
quote a few: 

During the ten years from 1870 to 1880, inclusive, the 
British mercantile marine increased its movement, in the 
matter of foreign entries and clearances alone, to the 
extent of 22,000,000 tons . . . yet the number of men 
who were employed in effecting this great movement had 
decreased in 1880, as compared with 1870, to the extent 
of about three thousand (2,990 exacdy). What did it? The 
introduction of steam-hoisting machines and grain eleva- 
tors upon the wharves and docks, the employment of 
steam power, etc. . . . 

In 1873 Bessemer steel in England, where its price 
had not been enhanced by protective duties, com- 
manded $80 per ton; in 1886 it was profitably manufac- 
tured and sold in the same country for less than $20 per 
ton. Within the same time the annual production capac- 
ity of a Bessemer converter has been increased fourfold, 
with no increase but rather a diminution of the involved 
labor. . . . 

The power capacity already being exerted by the 
steam engines of the world in existence and working in 
the year 1 887 has been estimated by the Bureau of Statis- 
tics at Berlin as equivalent to that of 200,000,000 horses, 
representing approximately 1,000,000,000 men; or at least 
three times the working population of the earth. 

One would think that this last figure would have caused Mr. Wells to 
pause, and wonder why there was any employment left in the world of 
1889 at all; but he merely concluded, with restrained pessimism, that 
“under such circumstances industrial overproduction . . . may become 

36 Economics in One Lesson 

In the depression of 1932, the game of blaming unemployment 
on the machines started all over again. Within a few months the doc- 
trines of a group calling themselves the Technocrats had spread 
through the country like a forest fire. I shall not weary the reader with 
a recital of the fantastic figures put forward by this group or with cor- 
rections to show what the real facts were. It is enough to say that the 
Technocrats returned to the error in all its native purity that machines 
permanendy displace men — except that, in their ignorance, they pre- 
sented this error as a new and revolutionary discovery of their own. 
It was simply one more illustration of Santayana’s aphorism that those 
who cannot remember the past are condemned to repeat it. 

The Technocrats were finally laughed out of existence; but their 
doctrine, which preceded them, lingers on. It is reflected in hundreds 
of make-work rules and feather-bed practices by labor unions; and 
these rules and practices are tolerated and even approved because of 
the confusion on this point in the public mind. 

Testifying on behalf of the United States Department of Justice 
before the Temporary National Economic Committee (better known 
as the TNEC) in March, 1941, Corwin Edwards cited innumerable 
examples of such practices. The electrical union in New York City was 
charged with refusal to install electrical equipment made outside of 
New York State unless the equipment was disassembled and reassem- 
bled at the job site. In Houston, Texas, master plumbers and the 
plumbing union agreed that piping prefabricated for installation 
would be installed by the union only if the thread were cut off one 
end of the pipe and new thread were cut at the job site. Various locals 
of the painters’ union imposed restrictions on the use of spray guns, 
restrictions in many cases designed merely to make work by requiring 
the slower process of applying paint with a brush. A local of the 
teamsters’ union required that every truck entering the New York 
metropolitan area have a local driver in addition to the driver already 
employed. In various cities the electrical union required that if any 
temporary light or power was to be used on a construction job there 
must be a full-time maintenance electrician, who should not be per- 
mitted to do any electrical construction work. This rule, according to 

The Curse of Machinery 37 

Mr. Edwards, “often involves the hiring of a man who spends his day 
reading or playing solitaire and does nothing except throw a switch at 
the beginning and end of the day.” 

One could go on to cite such make-work practices in many other 
fields. In the railroad industry, the unions insist that firemen be 
employed on types of locomotives that do not need them. In the the- 
aters unions insist on the use of scene shifters even in plays in which 
no scenery is used. The musicians’ union requires so-called “stand-in” 
musicians or even whole orchestras to be employed in many cases 
where only phonograph records are needed. 


One might pile up mountains of figures to show how wrong were 
the technophobes of the past. But it would do no good unless we 
understood clearly why they were wrong. For statistics and history are 
useless in economics unless accompanied by a basic deductive under- 
standing of the facts — which means in this case an understanding of 
why the past consequences of the introduction of machinery and 
other labor-saving devices had to occur. Otherwise the technophobes 
will assert (as they do in fact assert when you point out to them that 
the prophecies of their predecessors turned out to be absurd): “That 
may have been all very well in the past; but today conditions are fun- 
damentally different; and now we simply cannot afford to develop any 
more labor-saving machinery.” Mrs. Eleanor Roosevelt, indeed, in a 
syndicated newspaper column of September 19, 1945, wrote: “We 
have reached a point today where labor-saving devices are good only 
when they do not throw the worker out of his job.” 

If it were indeed true that the introduction of labor-saving 
machinery is a cause of constantly mounting unemployment and mis- 
ery, the logical conclusions to be drawn would be revolutionary, not 
only in the technical field but for our whole concept of civili 2 ation. 
Not only should we have to regard all further technical progress as a 
calamity; we should have to regard all past technical progress with 
equal horror. Every day each of us in his own capacity is engaged in 
trying to reduce the effort it requires to accomplish a given result. 

38 Economics in One Lesson 

Each of us is trying to save his own labor, to economize the means 
required to achieve his ends. Every employer, small as well as large, 
seeks constandy to gain his results more economically and effi- 
ciently — that is, by saving labor. Every intelligent workman tries to cut 
down the effort necessary to accomplish his assigned job. The most 
ambitious of us try tirelessly to increase the results we can achieve in 
a given number of hours. The technophobes, if they were logical and 
consistent, would have to dismiss all this progress and ingenuity as not 
only useless but vicious. Why should freight be carried from New 
York to Chicago by railroads when we could employ enormously 
more men, for example, to carry it all on their backs? 

Theories as false as this are never held with logical consistency, but 
they do great harm because they are held at all. Let us, therefore, try 
to see exactly what happens when technical improvements and labor- 
saving machinery are introduced. The details will vary in each 
instance, depending upon the particular conditions that prevail in a 
given industry or period. But we shall assume an example that involves 
the main possibilities. 

Suppose a clothing manufacturer learns of a machine that will 
make men’s and women’s overcoats for half as much labor as previ- 
ously. He installs the machines and drops half his labor force. 

This looks at first glance like a clear loss of employment. But the 
machine itself required labor to make it; so here, as one offset, are 
jobs that would not otherwise have existed. The manufacturer, how- 
ever, would have adopted the machine only if it had either made bet- 
ter suits for half as much labor, or had made the same kind of suits 
at a smaller cost. If we assume the latter, we cannot assume that the 
amount of labor to make the machines was as great in terms of pay- 
rolls as the amount of labor that the clothing manufacturer hopes to 
save in the long run by adopting the machine; otherwise there would 
have been no economy, and he would not have adopted it. 

So there is still a net loss of employment to be accounted for. But 
we should at least keep in mind the real possibility that even the first 
effect of the introduction of labor-saving machinery may be to 
increase employment on net balance; because it is usually only in the 

The Curse of Machinery 39 

long run that the clothing manufacturer expects to save money by 
adopting the machine: it may take several years for the machine to 
“pay for itself.” 

After the machine has produced economies sufficient to offset its 
cost, the clothing manufacturer has more profits than before. (We 
shall assume that he merely sells his coats for the same price as his 
competitors, and makes no effort to undersell them.) At this point, it 
may seem, labor has suffered a net loss of employment, while it is only 
the manufacturer, the capitalist, who has gained. But it is precisely out 
of these extra profits that the subsequent social gains must come. The 
manufacturer must use these extra profits in at least one of three ways, 
and possibly he will use part of them in all three: (1) he will use the 
extra profits to expand his operations by buying more machines to 
make more coats; or (2) he will invest the extra profits in some other 
industry; or (3) he will spend the extra profits on increasing his own 
consumption. Whichever of these three courses he takes, he will 
increase employment. 

In other words, the manufacturer, as a result of his economies, has 
profits that he did not have before. Every dollar of the amount he has 
saved in direct wages to former coat makers, he now has to pay out in 
indirect wages to the makers of the new machine, or to the workers 
in another capital industry, or to the makers of a new house or motor 
car for himself, or of jewelry and furs for his wife. In any case (unless 
he is a poindess hoarder) he gives indirecdy as many jobs as he ceased 
to give direcdy. 

But the matter does not and cannot rest at this stage. If this enter- 
prising manufacturer effects great economies as compared with his 
competitors, either he will begin to expand his operations at their 
expense, or they will start buying the machines too. Again more work 
will be given to the makers of the machines. But competition and pro- 
duction will then also begin to force down the price of overcoats. 
There will no longer be as great profits for those who adopt the new 
machines. The rate of profit of the manufacturers using the new 
machine will begin to drop, while the manufacturers who have still not 
adopted the machine may now make no profit at all. The savings, in 

40 Economics in One Lesson 

other words, will begin to be passed along to the buyers of over- 
coats — to the consumers. 

But as overcoats are now cheaper, more people will buy them. This 
means that, though it takes fewer people to make the same number of 
overcoats as before, more overcoats are now being made than before. 
If the demand for overcoats is what economists call “elastic” — that is, 
if a fall in the price of overcoats causes a larger total amount of 
money to be spent on overcoats than previously — then more people 
may be employed even in making overcoats than before the new 
labor-saving machine was introduced. We have already seen how this 
actually happened historically with stockings and other textiles. 

But the new employment does not depend on the elasticity of 
demand for the particular product involved. Suppose that, though the 
price of overcoats was almost cut in half — from a former price, say, 
of $50 to a new price of $30 — not a single additional coat was sold. 
The result would be that while consumers were as well provided with 
new overcoats as before, each buyer would now have $20 left over that 
he would not have had left over before. He will therefore spend this 
$20 for something else, and so provide increased employment in other 

In brief, on net balance, machines, technological improvements, 
economies and efficiency do not throw men out of work. 


Not all inventions and discoveries, of course, are “labor-saving” 
machines. Some of them, like precision instruments, like nylon, lucite, 
plywood, and plastics of all kinds, simply improve the quality of prod- 
ucts. Others, like the telephone or the airplane, perform operations 
that direct human labor could not perform at all. Still others bring into 
existence objects and services, such as X-rays, radios, and synthetic 
rubber, that would otherwise not even exist. But in the foregoing illus- 
tration we have taken precisely the kind of machine that has been the 
special object of modern technophobia. 

It is possible, of course, to push too far the argument that machines 
do not on net balance throw men out of work. It is sometimes 

The Curse of Machinery 41 

argued, for example, that machines create more jobs than would oth- 
erwise have existed. Under certain conditions this may be true. They 
can certainly create enormously more jobs in particular trades. The eigh- 
teenth-century figures for the textile industries are a case in point. 
Their modern counterparts are certainly no less striking. In 1910, 
140,000 persons were employed in the United States in the newly cre- 
ated automobile industry. In 1920, as the product was improved and 
its cost reduced, the industry employed 250,000. In 1930, as this prod- 
uct improvement and cost reduction continued, employment in the 
industry was 380,000. In 1940 it had risen to 450,000. By 1940, 35,000 
people were employed in making electric refrigerators, and 60,000 
were in the radio industry. So it has been in one newly created trade 
after another, as the invention was improved and the cost reduced. 

There is also an absolute sense in which machines may be said to 
have enormously increased the number of jobs. The population of 
the world today is three times as great as in the middle of the eigh- 
teenth century, before the Industrial Revolution had got well under 
way. Machines may be said to have given birth to this increased pop- 
ulation; for without the machines, the world would not have been able 
to support it. Two out of every three of us, therefore, may be said to 
owe not only our jobs but our very lives to machines. 

Yet it is a misconception to think of the function or result of 
machines as primarily one of creating jobs. The real result of the 
machine is to increase production, to raise the standard of living, to 
increase economic welfare. It is no trick to employ everybody, even (or 
especially) in the most primitive economy. Full employment — very full 
employment; long, weary, back-breaking employment — is characteris- 
tic of precisely the nations that are most retarded industrially. Where 
full employment already exists, new machines, inventions, and discov- 
eries cannot — until there has been time for an increase in popula- 
tion — bring more employment. They are likely to bring more unem- 
ployment (but this time I am speaking of voluntary and not involuntary 
unemployment) because people can now afford to work fewer hours, 
while children and the overaged no longer need to work. 

42 Economics in One Lesson 

What machines do, to repeat, is to bring an increase in production 
and an increase in the standard of living. They may do this in either 
of two ways. They do it by making goods cheaper for consumers (as 
in our illustration of the overcoats), or they do it by increasing wages 
because they increase the productivity of the workers. In other words, 
they either increase money wages or, by reducing prices, they increase 
the goods and services that the same money wages will buy. Some- 
times they do both. What actually happens will depend in large part 
upon the monetary policy pursued in a country. But in any case, 
machines, inventions, and discoveries increase real wages. 


A warning is necessary before we leave this subject. It was precisely 
the great merit of the classical economists that they looked for sec- 
ondary consequences, that they were concerned with the effects of a 
given economic policy or development in the long run and on the 
whole community. But it was also their defect that, in taking the long 
view and the broad view, they sometimes neglected to take also the 
short view and the narrow view. They were too often inclined to min- 
imize or to forget altogether the immediate effects of developments 
on special groups. We have seen, for example, that the English stock- 
ing knitters suffered real tragedies as a result of the introduction of 
the new stocking frames, one of the earliest inventions of the Indus- 
trial Revolution. 

But such facts and their modern counterparts have led some writ- 
ers to the opposite extreme of looking only at the immediate effects on 
certain groups. Joe Smith is thrown out of a job by the introduction 
of some new machine. “Keep your eye on |oe Smith,” these writers 
insist. “Never lose track of Joe Smith.” But what they then proceed to 
do is to keep their eyes only on Joe Smith, and to forget Tom Jones, 
who has just got a new job in making the new machine, and Ted 
Brown, who has just got a job operating one, and Daisy Miller, who 
can now buy a coat for half what it used to cost her. And because they 
think only of Joe Smith, they end by advocating reactionary and non- 
sensical policies. 

The Curse of Machinery 43 

Yes, we should keep at least one eye on Joe Smith. He has been 
thrown out of a job by the new machine. Perhaps he can soon get 
another job, even a better one. But perhaps, also, he has devoted many 
years of his life to acquiring and improving a special skill for which the 
market no longer has any use. He has lost this investment in himself, in 
his old skill, just as his former employer, perhaps, has lost his investment 
in old machines or processes suddenly rendered obsolete. He was a 
skilled workman, and paid as a skilled workman. Now he has become 
overnight an unskilled workman again, and can hope, for the present, 
only for the wages of an unskilled workman, because the one skill he had 
is no longer needed. We cannot and must not forget Joe Smith. His is 
one of the personal tragedies that, as we shall see, are incident to nearly 
all industrial and economic progress. 

To ask precisely what course we should follow with Joe Smith — 
whether we should let him make his own adjustment, give him sepa- 
ration pay or unemployment compensation, put him on relief, or train 
him at government expense for a new job — would carry us beyond 
the point that we are here trying to illustrate. The central lesson is that 
we should try to see all the main consequences of any economic pol- 
icy or development — the immediate effects on special groups, and the 
long-run effects on all groups. 

If we have devoted considerable space to this issue, it is because 
our conclusions regarding the effects of new machinery, inventions 
and discoveries on employment, production and welfare are crucial. If 
we are wrong about these, there are few things in economics about 
which we are likely to be right. 

Chapter 8 

Spread-the-Work Schemes 

I have referred to various union make-work and featherbed prac- 
tices. These practices, and the public toleration of them, spring 
from the same fundamental fallacy as the fear of machines. This is the 
belief that a more efficient way of doing a thing destroys jobs, and its 
necessary corollary that a less efficient way of doing it creates them. 

Allied to this fallacy is the belief that there is just a fixed amount of 
work to be done in the world, and that, if we cannot add to this work by 
thinking up more cumbersome ways of doing it, at least we can think of 
devices for spreading it around among as large a number of people as 

This error lies behind the minute subdivision of labor upon which 
unions insist. In the building trades in large cities the subdivision is 
notorious. Bricklayers are not allowed to use stones for a chimney: that 
is the special work of stonemasons. An electrician cannot rip out a 
board to fix a connection and put it back again: that is the special job, 
no matter how simple it may be, of the carpenters. A plumber will not 
remove or put back a tile incident to fixing a leak in the shower: that is 
the job of a tile setter. 

Furious “jurisdictional” strikes are fought among unions for the 
exclusive right to do certain types of borderline jobs. In a statement 
recently prepared by the American railroads for the Attorney General’s 


46 Economics in One Lesson 

Committee on Administrative Procedure, the railroads gave innumer- 
able examples in which the National Railroad Adjustment Board had 
decided that 

each separate operation on the railroad, no matter how 
minute, such as talking over a telephone or spiking or 
unspiking a switch, is so far an exclusive property of a 
particular class of employee that if an employee of 
another class, in the course of his regular duties, per- 
forms such operations he must not only be paid an extra 
day’s wages for doing so, but at the same time the fur- 
loughed or unemployed members of the class held to be 
entitled to perform the operation must be paid a day’s 
wages for not having been called upon to perform it. 

It is true that a few persons can profit at the expense of the rest 
of us from this minute arbitrary subdivision of labor — provided it 
happens in their case alone. But those who support it as a general 
practice fail to see that it always raises production costs; that it results 
on net balance in less work done and in fewer goods produced. The 
householder who is forced to employ two men to do the work of one 
has, it is true, given employment to one extra man. But he has just 
that much less money left over to spend on something that would 
employ somebody else. Because his bathroom leak has been repaired 
at double what it should have cost, he decides not to buy the new 
sweater he wanted. “Labor” is no better off, because a day’s employ- 
ment of an unneeded tilesetter has meant a day’s employment of a 
sweater knitter or machine handler. The householder, however, is 
worse off. Instead of having a repaired shower and a sweater, he has 
the shower and no sweater. And if we count the sweater as part of 
the national wealth, the country is short one sweater. This symbolizes 
the net result of the effort to make extra work by arbitrary subdivi- 
sion of labor. 

But there are other schemes for “spreading the work” often put 
forward by union spokesmen and legislators. The most frequent of 

Spread-the-Work Schemes 47 

these is the proposal to shorten the working week, usually by law The 
belief that it would “spread the work” and “give more jobs” was one 
of the main reasons behind the inclusion of the penalty-overtime pro- 
vision in the existing Federal Wage-Hour Law The previous legisla- 
tion in the States, forbidding the employment of women or minors 
for more, say, than forty-eight hours a week, was based on the convic- 
tion that longer hours were injurious to health and morale. Some of it 
was based on the belief that longer hours were harmful to efficiency. 
But the provision in the Federal law, that an employer must pay a 
worker a 50 percent premium above his regular hourly rate of wages 
for all hours worked in any week above forty, was not based primarily 
on the belief that forty- five hours a week, say, was injurious either to 
health or efficiency. It was inserted partly in the hope of boosting the 
worker’s weekly income, and partly in the hope that, by discouraging 
the employer from taking on anyone regularly for more than forty 
hours a week, it would force him to employ additional workers 
instead. At the time of writing this, there are many schemes for 
“averting unemployment” by enacting a thirty-hour week. 

What is the actual effect of such plans, whether enforced by indi- 
vidual unions or by legislation? It will clarify the problem if we con- 
sider two cases. The first is a reduction in the standard working week 
from forty hours to thirty without any change in the hourly rate of 
pay. The second is a reduction in the working week from forty hours 
to thirty, but with a sufficient increase in hourly wage rates to main- 
tain the same weekly pay for the individual workers already employed. 

Let us take the first case. We assume that the working week is cut 
from forty hours to thirty, with no change in hourly pay. If there is 
substantial unemployment when this plan is put into effect, the plan 
will no doubt provide additional jobs. We cannot assume that it will 
provide sufficient additional jobs, however, to maintain the same pay- 
rolls and the same number of man-hours as before, unless we make 
the unlikely assumptions that in each industry there has been exactly 
the same percentage of unemployment and that the new men and 
women employed are no less efficient at their special tasks on the 
average than those who had already been employed. But suppose we 

48 Economics in One Lesson 

do make these assumptions. Suppose we do assume that the right 
number of additional workers of each skill is available, and that the 
new workers do not raise production costs. What will be the result of 
reducing the working week from forty hours to thirty (without any 
increase in hourly pay)? 

Though more workers will be employed, each will be working fewer 
hours, and there will, therefore, be no net increase in man-hours. It is 
unlikely that there will be any significant increase in production. Total 
payrolls and “purchasing power” will be no larger. All that will have 
happened, even under the most favorable assumptions (which would 
seldom be realized) is that the workers previously employed will subsi- 
dize, in effect, the workers previously unemployed. For in order that 
the new workers will individually receive three-fourths as many dollars 
a week as the old workers used to receive, the old workers will them- 
selves now individually receive only three-fourths as many dollars a 
week as previously. It is true that the old workers will now work fewer 
hours; but this purchase of more leisure at a high price is presumably 
not a decision they have made for its own sake: it is a sacrifice made to 
provide others with jobs. 

The labor union leaders who demand shorter weeks to “spread the 
work” usually recognize this, and therefore they put the proposal for- 
ward in a form in which everyone is supposed to eat his cake and have 
it too. Reduce the working week from forty hours to thirty, they tell 
us, to provide more jobs; but compensate for the shorter week by 
increasing the hourly rate of pay by 33 31 /4t percent. The workers 
employed, say, were previously getting an average of $40 a week for 
forty hours work; in order that they may still get $40 for only thirty 
hours work, the hourly rate of pay must be advanced to an average of 

$1.33 “/«. 

What would be the consequences of such a plan? The first and 
most obvious consequence would be to raise costs of production. If 
we assume that the workers, when previously employed for forty 
hours, were getting less than the level of production costs, prices, and 
profits made possible, then they could have got the hourly increase 
without reducing the length of the working week. They could, in other 

Spread-the-Work Schemes 49 

words, have worked the same number of hours and got their total 
weekly incomes increased by one-third, instead of merely getting, as they 
are under the new thirty-hour week, the same weekly income as 
before. But if, under the forty-hour week, the workers were already 
getting as high a wage as the level of production costs and prices 
made possible (and the very unemployment they are trying to cure 
may be a sign that they were already getting even more than this), then 
the increase in production costs as a result of the 33V4* percent 
increase in hourly wage rates will be much greater than the existing 
state of prices, production, and costs can stand. 

The result of the higher wage rate, therefore, will be a much greater 
unemployment than before. The least efficient firms will be thrown out 
of business, and the least efficient workers will be thrown out of jobs. 
Production will be reduced all around the circle. Higher production 
costs and scarcer supplies will tend to raise prices, so that workers can 
buy less with the same dollar wages; on the other hand, the increased 
unemployment will shrink demand and hence tend to lower prices. 
What ultimately happens to the prices of goods will depend upon what 
monetary policies are then followed. But if a policy of monetary infla- 
tion is pursued, to enable prices to rise so that the increased hourly 
wages can be paid, this will merely be a disguised way of reducing real 
wage rates, so that these will return, in terms of the amount of goods 
they can purchase, to the same real rate as before. The result would 
then be the same as if the working week had been reduced without an 
increase in hourly wage rates. And the results of that have already been 

The spread-the-work schemes, in brief, rest on the same sort of 
illusion that we have been considering. The people who support such 
schemes think only of the employment they would provide for partic- 
ular persons or groups; they do not stop to consider what their whole 
effect would be on everybody. 

The spread-the-work schemes rest also, as we began by pointing 
out, on the false assumption that there is just a fixed amount of work 
to be done. There could be no greater fallacy. There is no limit to the 
amount of work to be done as long as any human need or wish that 

50 Economics in One Lesson 

work could fill remains unsatisfied. In a modern exchange economy, 
the most work will be done when prices, costs, and wages are in the 
best relations to each other. What these relations are we shall later 

Chapter 9 

Disbanding Troops and Bureaucrats 


W hen, after every great war, it is proposed to demobilize the 
armed forces, there is always a great fear that there will not be 
enough jobs for these forces and that in consequence they will be 
unemployed. It is true that, when millions of men are suddenly 
released, it may require time for private industry to reabsorb them — 
though what has been chiefly remarkable in the past has been the 
speed, rather than the slowness, with which this was accomplished. 
The fears of unemployment arise because people look at only one side 
of the process. 

They see soldiers being turned loose on the labor market. Where 
is the “purchasing power” going to come from to employ them? If 
we assume that the public budget is being balanced, the answer is 
simple. The government will cease to support the soldiers. But the 
taxpayers will be allowed to retain the funds that were previously 
taken from them in order to support the soldiers. And the taxpayers 
will then have additional funds to buy additional goods. Civilian 
demand, in other words, will be increased, and will give employment 
to the added labor force represented by the soldiers. 

If the soldiers have been supported by an unbalanced budget — that 
is, by government borrowing and other forms of deficit financing — 


52 "Economics in One Lesson 

the case is somewhat different. But that raises a different question: we 
shall consider the effects of deficit financing in a later chapter. It is 
enough to recognize that deficit financing is irrelevant to the point 
that has just been made; for if we assume that there is any advantage 
in a budget deficit, then precisely the same budget deficit could be 
maintained as before by simply reducing taxes by the amount previ- 
ously spent in supporting the wartime army. 

But the demobilization will not leave us economically just where 
we were before it started. The soldiers previously supported by civil- 
ians will not become merely civilians supported by other civilians. 
They will become self-supporting civilians. If we assume that the men 
who would otherwise have been retained in the armed forces are no 
longer needed for defense, then their retention would have been sheer 
waste. They would have been unproductive. The taxpayers, in return 
for supporting them, would have got nothing. But now the taxpayers 
turn over this part of their funds to them as fellow civilians in return 
for equivalent goods or services. Total national production, the wealth 
of everybody, is higher. 


The same reasoning applies to civilian government officials when- 
ever they are retained in excessive numbers and do not perform serv- 
ices for the community reasonably equivalent to the remuneration 
they receive. Yet whenever any effort is made to cut down the num- 
ber of unnecessary officeholders the cry is certain to be raised that 
this action is “deflationary.” Would you remove the “purchasing 
power” from these officials? Would you injure the landlords and 
tradesmen who depend on that purchasing power? You are simply 
cutting down “the national income” and helping to bring about or 
intensify a depression. 

Once again the fallacy comes from looking at the effects of this 
action only on the dismissed officeholders themselves and on the par- 
ticular tradesmen who depend upon them. Once again it is forgotten 
that, if these bureaucrats are not retained in office, the taxpayers will 
be permitted to keep the money that was formerly taken from them 

Disbanding Troops and Bureaucrats 53 

for the support of the bureaucrats. Once again it is forgotten that the 
taxpayers’ income and purchasing power go up by at least as much as 
the income and purchasing power of the former officeholders go 
down. If the particular shopkeepers who formerly got the business of 
these bureaucrats lose trade, other shopkeepers elsewhere gain at least 
as much. Washington is less prosperous, and can, perhaps, support 
fewer stores; but other towns can support more. 

Once again, however, the matter does not end there. The country 
is not merely as well off without the superfluous officeholders as it 
would have been had it retained them. It is much better off. For the 
officeholders must now seek private jobs or set up private businesses. 
And the added purchasing power of the taxpayers, as we noted in the 
case of the soldiers, will encourage this. But the officeholders can take 
private jobs only by supplying equivalent services to those who pro- 
vide the jobs — or, rather, to the customers of the employers who pro- 
vide the jobs. Instead of being parasites, they become productive men 
and women. 

I must insist again that in all this I am not talking of public office- 
holders whose services are really needed. Necessary policemen, fire- 
men, street cleaners, health officers, judges, legislators, and executives 
perform productive services as important as those of anyone in pri- 
vate industry. They make it possible for private industry to function in 
an atmosphere of law, order, freedom, and peace. But their justifica- 
tion consists in the utility of their services. It does not consist in the 
“purchasing power” they possess by virtue of being on the public pay- 

This “purchasing power” argument is, when one considers it seri- 
ously, fantastic. It could just as well apply to a racketeer or a thief who 
robs you. After he takes your money he has more purchasing power. 
He supports with it bars, restaurants, nightclubs, tailors, perhaps auto- 
mobile workers. But for every job his spending provides, your own 
spending must provide one less, because you have that much less to 
spend. Just so the taxpayers provide one less job for every job supplied 
by the spending of officeholders. When your money is taken by a thief, 
you get nothing in return. When your money is taken through taxes to 

54 Economics in One Lesson 

support needless bureaucrats, precisely the same situation exists. We 
are lucky, indeed, if the needless bureaucrats are mere easygoing 
loafers. They are more likely today to be energetic reformers busily dis- 
couraging and disrupting production. 

When we can find no better argument for the retention of any 
group of officeholders than that of retaining their purchasing power, 
it is a sign that the time has come to get rid of them. 

Chapter 10 

The Fetish of Full Employment 

T he economic goal of any nation, as of any individual, is to get the 
greatest results with the least effort. The whole economic 
progress of mankind has consisted in getting more production with 
the same labor. It is for this reason that men began putting burdens on 
the backs of mules instead of on their own; that they went on to invent 
the wheel and the wagon, the railroad and the motor truck. It is for this 
reason that men used their ingenuity to develop 100,000 labor-saving 

All this is so elementary that one would blush to state it if it were 
not being constantly forgotten by those who coin and circulate the new 
slogans. Translated into national terms, this first principle means that 
our real objective is to maximize production. In doing this, full employ- 
ment — that is, the absence of involuntary idleness — becomes a neces- 
sary by-product. But production is the end, employment merely the 
means. We cannot continuously have the fullest production without 
full employment. But we can very easily have full employment without 
full production. 

Primitive tribes are naked, and wretchedly fed and housed, but 
they do not suffer from unemployment. China and India are incom- 
parably poorer than ourselves, but the main trouble from which they 
suffer is primitive production methods (which are both a cause and a 


56 Economics in One Lesson 

consequence of a shortage of capital) and not unemployment. Noth- 
ing is easier to achieve than full employment, once it is divorced from 
the goal of full production and taken as an end in itself. Hider pro- 
vided full employment with a huge armament program. The war pro- 
vided full employment for every nation involved. The slave labor in 
Germany had full employment. Prisons and chain gangs have full 
employment. Coercion can always provide full employment. 

Yet our legislators do not present Full Production bills in Congress 
but Full Employment bills. Even committees of businessmen recom- 
mend “a President’s Commission on Full Employment,” not on Full 
Production, or even on Full Employment and Full Production. Every- 
where the means is erected into the end, and the end itself is forgot- 

Wages and employment are discussed as if they had no relation to 
productivity and output. On the assumption that there is only a fixed 
amount of work to be done, the conclusion is drawn that a thirty-hour 
week will provide more jobs and will therefore be preferable to a 
forty-hour week. A hundred make-work practices of labor unions are 
confusedly tolerated. When a Petrillo threatens to put a radio station 
out of business unless it employs twice as many musicians as it needs, 
he is supported by part of the public because he is after all merely try- 
ing to create jobs. When we had our WPA, it was considered a mark 
of genius for the administrators to think of projects that employed 
the largest number of men in relation to the value of the work per- 
formed — in other words, in which labor was least efficient. 

It would be far better, if that were the choice — which it isn’t — to 
have maximum production with part of the population supported in 
idleness by undisguised relief than to provide “full employment” by so 
many forms of disguised make-work that production is disorganized. 
The progress of civilization has meant the reduction of employment, 
not its increase. It is because we have become increasingly wealthy as 
a nation that we have been able to virtually eliminate child labor, to 
remove the necessity of work for many of the aged and to make it 
unnecessary for millions of women to take jobs. A much smaller pro- 
portion of the American population needs to work than that, say, of 

The Fetish of Full Fmployment 57 

China or of Russia. The real question is not whether there will be 
50,000,000 or 60,000,000 jobs in America in 1950, but how much shall 
we produce, and what, in consequence, will be our standard of living? 
The problem of distribution, on which all the stress is being put today, 
is after all more easily solved the more there is to distribute. 

We can clarify our thinking if we put our chief emphasis where it 
belongs — on policies that will maximize production. 

Chapter 11 

Who’s “Protected” by Tariffs? 


A mere recital of the economic policies of governments all over 
the world is calculated to cause any serious student of eco- 
nomics to throw up his hands in despair. What possible point can 
there be, he is likely to ask, in discussing refinements and advances 
in economic theory, when popular thought and the actual policies 
of governments, certainly in everything connected with interna- 
tional relations, have not yet caught up with Adam Smith? For pres- 
ent-day tariff and trade policies are not only as bad as those in the 
seventeenth and eighteenth centuries, but incomparably worse. The 
real reasons for those tariffs and other trade barriers are the same, 
and the pretended reasons are also the same. 

In the century and three-quarters since The Wealth of Nations 
appeared, the case for free trade has been stated thousands of times, 
but perhaps never with more direct simplicity and force than it was 
stated in that volume. In general Smith rested his case on one funda- 
mental proposition: “In every country it always is and must be the 
interest of the great body of the people to buy whatever they want of 
those who sell it cheapest.” “The proposition is so very manifest,” 
Smith continued, “that it seems ridiculous to take any pains to prove it; 
nor could it ever have been called in question, had not the interested 


60 Economics in One Lesson 

sophistry of merchants and manufacturers confounded the common- 
sense of mankind.” 

From another point of view, free trade was considered as one 
aspect of the specialization of labor: 

It is the maxim of every prudent master of a family, never 
to attempt to make at home what it will cost him more to 
make than to buy. The tailor does not attempt to make his 
own shoes, but buys them of the shoemaker. The shoe- 
maker does not attempt to make his own clothes, but 
employs a tailor. The farmer attempts to make neither the 
one nor the other, but employs those different artificers. 

All of them find it for their interest to employ their whole 
industry in a way in which they have some advantage over 
their neighbors, and to purchase with a part of its pro- 
duce, or what is the same thing, with the price of a part 
of it, whatever else they have occasion for. What is pru- 
dence in the conduct of every private family can scarce be 
folly in that of a great kingdom. 

But whatever led people to suppose that what was prudence in the 
conduct of every private family could be folly in that of a great king- 
dom? It was a whole network of fallacies, out of which mankind has 
still been unable to cut its way. And the chief of them was the cen- 
tral fallacy with which this book is concerned. It was that of consid- 
ering merely the immediate effects of a tariff on special groups, and 
neglecting to consider its long-run effects on the whole community. 


An American manufacturer of woolen sweaters goes to Congress 
or to the State Department and tells the committee or officials con- 
cerned that it would be a national disaster for them to remove or 
reduce the tariff on British sweaters. He now sells his sweaters for 
$15 each, but English manufacturers could sell here sweaters of the 
same quality for $10. A duty of $5, therefore, is needed to keep him 

Who’s “Protected” by Tariffs ? 61 

in business. He is not thinking of himself, of course, but of the thou- 
sand men and women he employs, and of the people to whom their 
spending in turn gives employment. Throw them out of work, and 
you create unemployment and a fall in purchasing power, which would 
spread in ever-widening circles. And if he can prove that he really 
would be forced out of business if the tariff were removed or 
reduced, his argument against that action is regarded by Congress as 

But the fallacy comes from looking merely at this manufacturer 
and his employees, or merely at the American sweater industry. It 
comes from noticing only the results that are immediately seen, and 
neglecting the results that are not seen because they are prevented 
from coming into existence. 

The lobbyists for tariff protection are continually putting forward 
arguments that are not factually correct. But let us assume that the 
facts in this case are precisely as the sweater manufacturer has stated 
them. Let us assume that a tariff of $5 a sweater is necessary for him 
to stay in business and provide employment at sweater making for his 

We have deliberately chosen the most unfavorable example of any 
for the removal of a tariff. We have not taken an argument for the 
imposition of a new tariff in order to bring a new industry into exis- 
tence, but an argument for the retention of a tariff that has already 
brought an industry into existence, and cannot be repealed without hurting 

The tariff is repealed; the manufacturer goes out of business; a 
thousand workers are laid off; the particular tradesmen whom they 
patronized are hurt. This is the immediate result that is seen. But there 
are also results which, while much more difficult to trace, are no less 
immediate and no less real. For now sweaters that formerly cost $15 
apiece can be bought for $10. Consumers can now buy the same qual- 
ity of sweater for less money, or a much better one for the same 
money. If they buy the same quality of sweater, they not only get the 
sweater, but they have $5 left over, which they would not have had 
under the previous conditions, to buy something else. With the $10 

62 Economics in One Lesson 

that they pay for the imported sweater they help employment — as the 
American manufacturer no doubt predicted — in the sweater industry 
in England. With the $5 left over they help employment in any num- 
ber of other industries in the United States. 

But the results do not end there. By buying English sweaters they 
furnish the English with dollars to buy American goods here. This, in 
fact (if I may here disregard such complications as multilateral 
exchange, loans, credits, gold movements, etc. which do not alter the 
end result) is the only way in which the British can eventually make use 
of these dollars. Because we have permitted the British to sell more to 
us, they are now able to buy more from us. They are, in fact, eventually 
forced to buy more from us if their dollar balances are not to remain per- 
petually unused. So, as a result of letting in more British goods, we 
must export more American goods. And though fewer people are now 
employed in the American sweater industry, more people are 
employed — and much more efficiently employed — in, say, the Ameri- 
can automobile or washing-machine business. American employment 
on net balance has not gone down, but American and British produc- 
tion on net balance has gone up. Labor in each country is more fully 
employed in doing just those things that it does best, instead of being 
forced to do things that it does inefficiently or badly. Consumers in 
both countries are better off. They are able to buy what they want 
where they can get it cheapest. American consumers are better pro- 
vided with sweaters, and British consumers are better provided with 
motor cars and washing machines. 


Now let us look at the matter the other way round, and see the effect 
of imposing a tariff in the first place. Suppose that there had been no tar- 
iff on foreign knit goods, that Americans were accustomed to buying for- 
eign sweaters without duty, and that the argument were then put forward 
that we could bring a sweater industry into existence by imposing a duty of $5 on 

There would be nothing logically wrong with this argument so far 
as it went. The cost of British sweaters to the American consumer 

Who’s “Protected” by Tariffs? 63 

might thereby be forced so high that American manufacturers would 
find it profitable to enter the sweater business. But American con- 
sumers would be forced to subsidize this industry. On every American 
sweater they bought they would be forced in effect to pay a tax of $5 
which would be collected from them in a higher price by the new 
sweater industry. 

Americans would be employed in a sweater industry who had not 
previously been employed in a sweater industry. That much is true. 
But there would be no net addition to the country’s industry or the 
country’s employment. Because the American consumer had to pay $5 
more for the same quality of sweater he would have just that much 
less left over to buy anything else. He would have to reduce his expen- 
ditures by $5 somewhere else. In order that one industry might grow 
or come into existence, a hundred other industries would have to 
shrink. In order that 20,000 persons might be employed in a sweater 
industry, 20,000 fewer persons would be employed elsewhere. 

But the new industry would be visible. The number of its employ- 
ees, the capital invested in it, the market value of its product in terms 
of dollars, could be easily counted. The neighbors could see the 
sweater workers going to and from the factory every day. The results 
would be palpable and direct. But the shrinkage of a hundred other 
industries, the loss of 20,000 other jobs somewhere else, would not 
be so easily noticed. It would be impossible for even the cleverest 
statistician to know precisely what the incidence of the loss of other 
jobs had been — precisely how many men and women had been laid 
off from each particular industry, precisely how much business each 
particular industry had lost — because consumers had to pay more 
for their sweaters. For a loss spread among all the other productive 
activities of the country would be comparatively minute for each. It 
would be impossible for anyone to know precisely how each con- 
sumer would h ave spent his extra $5 if he had been allowed to retain 
it. The overwhelming majority of the people, therefore, would prob- 
ably suffer from the optical illusion that the new industry had cost 
us nothing. 

64 Economics in One Lesson 


It is important to notice that the new tariff on sweaters would not 
raise American wages. To be sure, it would enable Americans to work 
in the sweater industry at approximately the average level of American 
wages (for workers of their skill), instead of having to compete in that 
industry at the British level of wages. But there would be no increase 
of American wages in general as a result of the duty; for, as we have 
seen, there would be no net increase in the number of jobs provided, 
no net increase in the demand for goods, and no increase in labor pro- 
ductivity. Labor productivity would, in fact, be reduced as a result of the 

And this brings us to the real effect of a tariff wall. It is not merely 
that all its visible gains are offset by less obvious but no less real losses. 
It results, in fact, in a net loss to the country. For contrary to centuries 
of interested propaganda and disinterested confusion, the tariff reduces 
the American level of wages. 

Let us observe more clearly how it does this. We have seen that the 
added amount which consumers pay for a tariff-protected article 
leaves them just that much less with which to buy all other articles. 
There is here no net gain to industry as a whole. But as a result of the 
artificial barrier erected against foreign goods, American labor, capital 
and land are deflected from what they can do more efficiently to what 
they do less efficiently. Therefore, as a result of the tariff wall, the 
average productivity of American labor and capital is reduced. 

If we look at it now from the consumer’s point of view, we find 
that he can buy less with his money. Because he has to pay more for 
sweaters and other protected goods, he can buy less of everything 
else. The general purchasing power of his income has therefore been 
reduced. Whether the net effect of the tariff is to lower money wages 
or to raise money prices will depend upon the monetary policies that 
are followed. But what is clear is that the tariff — though it may 
increase wages above what they would have been in the protected indus- 
tries — must on net balance, when all occupations are considered, reduce 
real wages. 

Who’s “Protected” by Tariffs? 65 

Only minds corrupted by generations of misleading propaganda 
can regard this conclusion as paradoxical. What other result could we 
expect from a policy of deliberately using our resources of capital and 
manpower in less efficient ways than we know how to use them? What 
other result could we expect from deliberately erecting artificial obsta- 
cles to trade and transportation? 

For the erection of tariff walls has the same effect as the erection 
of real walls. It is significant that the protectionists habitually use the 
language of warfare. They talk of “repelling an invasion” of foreign 
products. And the means they suggest in the fiscal field are like those 
of the batdefield. The tariff barriers that are put up to repel this inva- 
sion are like the tank traps, trenches, and barbed-wire entanglements 
created to repel or slow down attempted invasion by a foreign army. 

And just as the foreign army is compelled to employ more expensive 
means to surmount those obstacles — bigger tanks, mine detectors, engi- 
neer corps to cut wires, ford streams, and build bridges — so more expen- 
sive and efficient transportation means must be developed to surmount 
tariff obstacles. On the one hand, we try to reduce the cost of trans- 
portation between England and America, or Canada and the United 
States, by developing faster and more efficient ships, better roads and 
bridges, better locomotives and motor trucks. On the other hand, we 
offset this investment in efficient transportation by a tariff that makes it 
commercially even more difficult to transport goods than it was before. 
We make it $1 cheaper to ship the sweaters, and then increase the tariff 
by $2 to prevent the sweaters from being shipped. By reducing the 
freight that can be profitably carried, we reduce the value of the invest- 
ment in transport efficiency. 


The tariff has been described as a means of benefiting the pro- 
ducer at the expense of the consumer. In a sense this is correct. Those 
who favor it think only of the interests of the producers immediately 
benefited by the particular duties involved. They forget the interests of 
the consumers who are immediately injured by being forced to pay these 
duties. But it is wrong to think of the tariff issue as if it represented a 

66 Economics in One Lesson 

conflict between the interests of producers as a unit against those of 
consumers as a unit. It is true that the tariff hurts all consumers as 
such. It is not true that it benefits all producers as such. On the con- 
trary, as we have just seen, it helps the protected producers at the 
expense of all other American producers, and particularly of those who have 
a comparatively large potential export market. 

We can perhaps make this last point clearer by an exaggerated 
example. Suppose we make our tariff wall so high that it becomes 
absolutely prohibitive, and no imports come in from the outside world 
at all. Suppose, as a result of this, that the price of sweaters in Amer- 
ica goes up only $5. Then American consumers, because they have to 
pay $5 more for a sweater, will spend on the average five cents less in 
each of a hundred other American industries. (The figures are chosen 
merely to illustrate a principle: there will, of course, be no such sym- 
metrical distribution of the loss; moreover, the sweater industry itself 
will doubtless be hurt because of protection of still other industries. 
But these complications may be put aside for the moment.) 

Now because foreign industries will find their market in America 
totally cut off, they will get no dollar exchange, and therefore they will 
be unable to buy any American goods at all. As a result of this, American 
industries will suffer in direct proportion to the percentage of their 
sales previously made abroad. Those that will be most injured, in the 
first instance, will be such industries as raw cotton producers, copper 
producers, makers of sewing machines, agricultural machinery, type- 
writers and so on. 

A higher tariff wall, which, however, is not prohibitive, will pro- 
duce the same kind of results as this, but merely to a smaller degree. 

The effect of a tariff, therefore, is to change the structure of American 
production. It changes the number of occupations, the kind of occupa- 
tions, and the relative size of one industry as compared with another. It 
makes the industries in which we are comparatively inefficient larger, and 
the industries in which we are comparatively efficient smaller. Its net 
effect, therefore, is to reduce American efficiency, as well as to reduce 
efficiency in the countries with which we would otherwise have traded 
more largely. 

Who’s “Protected” by Tariffs? 67 

In the long run, notwithstanding the mountains of argument pro 
and con, a tariff is irrelevant to the question of employment. (True, 
sudden changes in the tariff, either upward or downward, can create 
temporary unemployment, as they force corresponding changes in the 
structure of production. Such sudden changes can even cause a 
depression.) But a tariff is not irrelevant to the question of wages. In 
the long run it always reduces real wages, because it reduces efficiency, 
production and wealth. 

Thus all the chief tariff fallacies stem from the central fallacy with 
which this book is concerned. They are the result of looking only at 
the immediate effects of a single tariff rate on one group of produc- 
ers, and forgetting the long-run effects both on consumers as a whole 
and on all other producers. 

(I hear some reader asking: “Why not solve this by giving tariff pro- 
tection to all producers?” But the fallacy here is that this cannot help 
producers uniformly, and cannot help at all domestic producers who 
already “outsell” foreign producers: these efficient producers must 
necessarily suffer from the diversion of purchasing power brought 
about by the tariff.) 


On the subject of the tariff we must keep in mind one final precau- 
tion. It is the same precaution that we found necessary in examining the 
effects of machinery. It is useless to deny that a tariff does benefit — or 
at least can benefit — special interests. True, it benefits them at the expense of 
mryone else. But it does benefit them. If one industry alone could get pro- 
tection, while its owners and workers enjoyed the benefits of free trade 
in everything else they bought, that industry would benefit, even on net 
balance. As an attempt is made to extend the tariff blessings, however, 
even people in the protected industries, both as producers and con- 
sumers, begin to suffer from other people’s protection, and may finally 
be worse off even on net balance than if neither they nor anybody else 
had protection. 

But we should not deny, as enthusiastic free traders have so often 
done, the possibility of these tariff benefits to special groups. We 

68 Economics in One Lesson 

should not pretend, for example, that a reduction of the tariff would 
help everybody and hurt nobody. It is true that its reduction would 
help the country on net balance. But somebody would be hurt. Groups 
previously enjoying high protection would be hurt. That in fact is one 
reason why it is not good to bring such protected interests into exis- 
tence in the first place. But clarity and candor of thinking compel us to 
see and acknowledge that some industries are right when they say that 
a removal of the tariff on their product would throw them out of busi- 
ness and throw their workers (at least temporarily) out of jobs. And if 
their workers have developed speciali 2 ed skills, they may even suffer 
permanently, or until they have at long last learnt equal skills. In trac- 
ing the effects of tariffs, as in tracing the effects of machinery, we 
should endeavor to see all the chief effects, in both the short run and 
the long run, on all groups. 

As a postscript to this chapter I should add that its argument is not 
directed against all tariffs, including duties collected mainly for rev- 
enue, or to keep alive industries needed for war; nor is it directed 
against all arguments for tariffs. It is merely directed against the fallacy 
that a tariff on net balance “provides employment,” “raises wages,” or 
“protects the American standard of living.” It does none of these 
things; and so far as wages and the standard of living are concerned, 
it does the precise opposite. But an examination of duties imposed for 
other purposes would carry us beyond our present subject. 

Nor need we here examine the effect of import quotas, exchange 
controls, bilateralism, and other devices in reducing, diverting or pre- 
venting international trade. Such devices have, in general, the same 
effects as high or prohibitive tariffs, and often worse effects. They 
present more complicated issues, but their net results can be traced 
through the same kind of reasoning that we have just applied to tariff 

Chapter 12 

The Drive for Exports 

E xceeded only by the pathological dread of imports that affects all 
nations is a pathological yearning for exports. Logically, it is true, 
nothing could be more inconsistent. In the long run imports and 
exports must equal each other (considering both in the broadest sense, 
which includes such “invisible” items as tourist expenditures and ocean 
freight charges). It is exports that pay for imports, and vice versa. The 
greater exports we have, the greater imports we must have, if we ever 
expect to get paid. The smaller imports we have, the smaller exports 
we can have. Without imports we can have no exports, for foreigners 
will have no funds with which to buy our goods. When we decide to 
cut down our imports, we are in effect deciding also to cut down our 
exports. When we decide to increase our exports, we are in effect 
deciding also to increase our imports. 

The reason for this is elementary. An American exporter sells his 
goods to a British importer and is paid in British pounds sterling. But 
he cannot use British pounds to pay the wages of his workers, to buy 
his wife’s clothes, or to buy theater tickets. For all these purposes he 
needs American dollars. Therefore his British pounds are of no use to 
him unless he either uses them himself to buy British goods or sells 
them to some American importer who wishes to use them to buy 
British goods. Whichever he does, the transaction cannot be completed 


70 Economics in One Lesson 

until the American exports have been paid for by an equal amount of 

The same situation would exist if the transaction had been con- 
ducted in terms of American dollars instead of British pounds. The 
British importer could not pay the American exporter in dollars unless 
some previous British exporter had built up a credit in dollars here as 
a result of some previous sale to us. Foreign exchange, in short, is a 
clearing transaction in which, in America, the dollar debts of foreign- 
ers are cancelled against their dollar credits. In England, the pound 
sterling debts of foreigners are cancelled against their sterling credits. 

There is no reason to go into the technical details of all this, which 
can be found in any good textbook on foreign exchange. But it should 
be pointed out that there is nothing inherendy mysterious about it (in 
spite of the mystery in which it is so often wrapped), and that it does 
not differ essentially from what happens in domestic trade. Each of us 
must also sell something, even if for most of us it is our own services 
rather than goods, in order to get the purchasing power to buy. 
Domestic trade is also conducted in the main by crossing off checks 
and other claims against each other through clearing houses. 

It is true that under an international gold standard discrepancies in 
balances of imports and exports are sometimes settied by shipments 
of gold. But they could just as well be setded by shipments of cotton, 
steel, whisky, perfume, or any other commodity. The chief difference 
is that the demand for gold is almost indefinitely expansible (pardy 
because it is thought of and accepted as a residual international 
“money” rather than as just another commodity), and that nations do 
not put artificial obstacles in the way of receiving gold as they do in 
the way of receiving almost everything else. (On the other hand, of 
late years they have taken to putting more obstacles in the way of 
exporting gold than in the way of exporting anything else: but that is 
another story.) 

Now the same people who can be clearheaded and sensible when 
the subject is one of domestic trade can be incredibly emotional and 
muddleheaded when it becomes one of foreign trade. In the latter 
field they can seriously advocate or acquiesce in principles which they 

The Drive for Exports 7 1 

would think it insane to apply in domestic business. A typical example 
is the belief that the government should make huge loans to foreign 
countries for the sake of increasing our exports, regardless of whether 
or not these loans are likely to be repaid. 

American citizens, of course, should be allowed to lend their own 
funds abroad at their own risk. The government should put no arbi- 
trary barriers in the way of private lending to countries with which we 
are at peace. We should give generously, for humane reasons alone, to 
peoples who are in great distress or in danger of starving. But we 
ought always to know clearly what we are doing. It is not wise to 
bestow charity on foreign peoples under the impression that one is 
making a hardheaded business transaction purely for one’s own self- 
ish purposes. That could only lead to misunderstandings and bad rela- 
tions later. 

Yet among the arguments put forward in favor of huge foreign 
lending one fallacy is always sure to occupy a prominent place. It runs 
like this. Even if half (or ail) the loans we make to foreign countries 
turn sour and are not repaid, this nation will still be better off for hav- 
ing made them, because they will give an enormous impetus to our 

It should be immediately obvious that if the loans we make to for- 
eign countries to enable them to buy our goods are not repaid, then 
we are giving the goods away. A nation cannot grow rich by giving 
goods away. It can only make itself poorer. 

No one doubts this proposition when it is applied privately. If an 
automobile company lends a man $1,000 to buy a car priced at that 
amount, and the loan is not repaid, the automobile company is not 
better off because it has “sold” the car. It has simply lost the amount 
that it cost to make the car. If the car cost $900 to make, and only half 
the loan is repaid, then the company has lost $900 minus $500, or a 
net amount of $400. It has not made up in trade what it lost in bad 

If this proposition is so simple when applied to a private company, 
why do apparently intelligent people get confused about it when 
applied to a nation? The reason is that the transaction must then be 

72 Economics in One Lesson 

traced mentally through a few more stages. One group may indeed 
make gains — while the rest of us take the losses. 

It is true, for example, that persons engaged exclusively or chiefly 
in export business might gain on net balance as a result of bad loans 
made abroad. The national loss on the transaction would be certain, 
but it might be distributed in ways difficult to follow. The private 
lenders would take their losses directly. The losses from government 
lending would ultimately be paid out of increased taxes imposed on 
everybody. But there would also be many indirect losses brought 
about by the effect on the economy of these direct losses. 

In the long run business and employment in America would be 
hurt, not helped, by foreign loans that were not repaid. For every extra 
dollar that foreign buyers had with which to buy American goods, 
domestic buyers would ultimately have one dollar less. Businesses that 
depend on domestic trade would therefore be hurt in the long run as 
much as export businesses would be helped. Even many concerns that 
did an export business would be hurt on net balance. American auto- 
mobile companies, for example, sold about 10 percent of their output 
in the foreign market before the war. It would not profit them to dou- 
ble their sales abroad as a result of bad foreign loans if they thereby 
lost, say, 20 percent of their American sales as the result of added 
taxes taken from American buyers to make up for the unpaid foreign 

None of this means, I repeat, that it is unwise to make foreign 
loans, but simply that we cannot get rich by making bad ones. 

For the same reasons that it is stupid to give a false stimulation to 
export trade by making bad loans or outright gifts to foreign coun- 
tries, it is stupid to give a false stimulation to export trade through 
export subsidies. Rather than repeat most of the previous argument, 
I leave it to the reader to trace the effects of export subsidies as I have 
traced the effects of bad loans. An export subsidy is a clear case of 
giving the foreigner something for nothing, by selling him goods for 
less than it costs us to make them. It is another case of trying to get 
rich by giving things away. 

The Drive for Exports 73 

Bad loans and export subsidies are additional examples of the 
error of looking only at the immediate effect of a policy on special 
groups, and of not having the patience or intelligence to trace the 
long-run effects of the policy on everyone. 

Chapter 13 

“Parity” Prices 


S pecial interests, as the history of tariffs reminds us, can think of 
the most ingenious reasons why they should be the objects of spe- 
cial solicitude. Their spokesmen present a plan in their favor; and it 
seems at first so absurd that disinterested writers do not trouble to 
expose it. But the special interests keep on insisting on the scheme. Its 
enactment would make so much difference to their own immediate 
welfare that they can afford to hire trained economists and “public 
relations experts” to propagate it in their behalf. The public hears the 
argument so often repeated, and accompanied by such a wealth of 
imposing statistics, charts, curves, and pie-slices, that it is soon taken 
in. When at last disinterested writers recognize that the danger of the 
scheme’s enactment is real, they are usually too late. They cannot in a 
few weeks acquaint themselves with the subject as thoroughly as the 
hired brains who have been devoting their full time to it for years; they 
are accused of being uninformed, and they have the air of men who 
presume to dispute axioms. 

This general history will do as a history of the idea of “parity” 
prices for agricultural products. I forget the first day when it made its 
appearance in a legislative bill; but with the advent of the New Deal 
in 1933 it had become a definitely established principle, enacted into 


76 Economics in One Lesson 

law; and as year succeeded year, and its absurd corollaries made them- 
selves manifest, they were enacted too. 

The argument for “parity” prices ran roughly like this. Agriculture is 
the most basic and important of all industries. It must be preserved at 
all costs. Moreover, the prosperity of everybody else depends upon the 
prosperity of the farmer. If he does not have the purchasing power to 
buy the products of industry, industry languishes. This was the cause of 
the 1929 collapse, or at least of our failure to recover from it. For the 
prices of farm products dropped violently, while the prices of industrial 
products dropped very little. The result was that the farmer could not 
buy industrial products; the city workers were laid off and could not buy 
farm products, and the depression spread in ever-widening vicious cir- 
cles. There was only one cure, and it was simple. Bring back the prices 
of the farmer’s products to a “parity” with the prices of the things the 
farmer buys. This parity existed in the period from 1909 to 1914, when 
farmers were prosperous. That price relationship must be restored and 
preserved perpetually. 

It would take too long, and carry us too far from our main point, 
to examine every absurdity concealed in this plausible statement. There 
is no sound reason for taking the particular price relationships that pre- 
vailed in a particular year or period and regarding them as sacrosanct, 
or even as necessarily more “normal” than those of any other period. 
Even if they were “normal” at the time, what reason is there to sup- 
pose that these same relationships should be preserved a generation 
later in spite of the enormous changes in the conditions of production 
and demand that have taken place in the meantime? The period of 
1909 to 1914, as the basis of “parity,” was not selected at random. In 
terms of relative prices it was one of the most favorable periods to 
agriculture in our entire history. 

If there had been any sincerity or logic in the idea, it would have 
been universally extended. If the price relationships between agricul- 
tural and industrial products that prevailed from August, 1909 to July, 
1914 ought to be preserved perpetually, why not preserve perpetually the 
price relationship of every commodity at that time to every other? A 
Chevrolet six-cylinder touring car cost $2,150 in 1912; an incomparably 

“Parity” Prices 77 

improved six-cylinder Chevrolet sedan cost $907 in 1942: adjusted for 
“parity” on the same basis as farm products, however, it would have 
cost $3,270 in 1942. A pound of aluminum from 1909 to 1913 inclu- 
sive averaged 22 n /42 cents; its price early in 1946 was 14 cents; but at 
“parity” it would then have cost, instead, 41 cents. 

I hear immediate cries that such comparisons are absurd, because 
everybody knows not only that the present-day automobile is incompa- 
rably superior in every way to the car of 1912, but that it costs only a 
fraction as much to produce, and that the same is true also of alu- 
minum. Exactly. But why doesn’t somebody say something about the 
amazing increase in productivity per acre in agriculture? In the five-year 
period 1939 to 1943 an average of 260 pounds of cotton was raised per 
acre in the United States as compared with an average of 1 88 pounds 
in the five-year period 1909 to 1913. Costs of production have been 
substantially lowered for farm products by better applications of chem- 
ical fertilizer, improved strains of seed, and increasing mechanization — 
by the gasoline tractor, the corn husker, the cotton picker. “On some 
large farms which have been completely mechanized and are operated 
along mass production lines, it requires only one-third to one-fifth the 
amount of labor to produce the same yields as it did a few years back.” 1 
Yet all this is ignored by the apostles of “parity” prices. 

The refusal to universalize the principle is not the only evidence 
that it is not a public-spirited economic plan but merely a device for 
subsidizing a special interest. Another evidence is that when agricul- 
tural prices go above “parity,” or are forced there by government poli- 
cies, there is no demand on the part of the farm bloc in Congress that 
such prices be brought down to “parity”, or that the subsidy be to that 
extent repaid. It is a rule that works only one way. 


Dismissing all these considerations, let us return to the central fal- 
lacy that specially concerns us here. This is the argument that if the 
farmer gets higher prices for his products he can buy more goods 

'New York Times, January 2, 1946. 

78 Economics in One Lesson 

from industry and so make industry prosperous and bring full 
employment. It does not matter to this argument, of course, whether 
or not the farmer gets specifically so-called “parity” prices. 

Everything, however, depends on how these higher prices are brought 
about. If they are the result of a general revival, if they follow from 
increased prosperity of business, increased industrial production and 
increased purchasing power of city workers (not brought about by infla- 
tion), then they can indeed mean increased prosperity and production 
not only for the farmers, but for everyone. But what we are discussing 
is a rise in farm prices brought about by government intervention. This 
can be done in several ways. The higher price can be forced by mere 
edict, which is the least workable method. It can be brought about by 
the government’s standing ready to buy all the farm products offered to 
it at the “parity” price. It can be brought about by the government’s 
lending to farmers enough money on their crops to enable them to hold 
the crops off the market until “parity” or a higher price is realized. It 
can be brought about by the government’s enforcing restrictions in the 
size of crops. It can be brought about, as it often is in practice, by a 
combination of these methods. For the moment we shall simply assume 
that, by whatever method, it is in any case brought about. 

What is the result? The farmers get higher prices for their crops. 
Their “purchasing power” is thereby increased. They are for the time 
being more prosperous themselves, and they buy more of the prod- 
ucts of industry. All this is what is seen by those who look merely at 
the immediate consequences of policies to the groups directly 

But there is another consequence, no less inevitable. Suppose the 
wheat which would otherwise sell at $1 a bushel is pushed up by this 
policy to $1.50. The farmer gets 50 cents a bushel more for wheat. But 
the city worker, by precisely the same change, pays 50 cents a bushel 
more for wheat in an increased price of bread. The same thing is true 
of any other farm product. If the farmer then has 50 cents more pur- 
chasing power to buy industrial products, the city worker has precisely 
that much less purchasing power to buy industrial products. On net 

“Parity” Prices 79 

balance industry in general has gained nothing. It loses in city sales 
precisely as much as it gains in rural sales. 

There is of course a change in the incidence of these sales. No 
doubt the agricultural-implement makers and the mail-order houses 
do a better business. But the city department stores do a smaller busi- 

The matter, however, does not end here. The policy results not 
merely in no net gain, but in a net loss. For it does not mean merely 
a transfer of purchasing power to the farmer from city consumers, 
or from the general taxpayer, or from both. It also means a forced 
cut in the production of farm commodities to bring up the price. 
This means a destruction of wealth. It means that there is less food 
to be consumed. How this destruction of wealth is brought about 
will depend upon the particular method pursued to bring prices up. 
It may mean the actual physical destruction of what has already 
been produced, as in the burning of coffee in Brazil. It may mean a 
forced restriction of acreage, as in the American AAA plan. We shall 
examine the effect of some of these methods when we come to the 
broader discussion of government commodity controls. 

But here it may be pointed out that when the farmer reduces the 
production of wheat to get “parity,” he may indeed get a higher price 
for each bushel, but he produces and sells fewer bushels. The result is 
that his income does not go up in proportion to his prices. Even some 
of the advocates of “parity prices” recognize this, and use it as an 
argument to go on to insist upon “parity income'’ for farmers. But this 
can only be achieved by a subsidy at the direct expense of taxpayers. 
To help the farmers, in other words, it merely reduces the purchasing 
power of city workers and other groups still more. 


There is one argument for “parity” prices that should be dealt with 
before we leave the subject. It is put forward by some of the more 
sophisticated defenders. “Yes,” they will freely admit, “the economic 
arguments for parity prices are unsound. Such prices are a special priv- 
ilege. They are an imposition on the consumer. But isn’t the tariff an 

80 Economics in One Lesson 

imposition on the farmer? Doesn’t he have to pay higher prices on 
industrial products because of it? It would do no good to place a com- 
pensating tariff on farm products, because America is a net exporter 
of farm products. Now the parity-price system is the farmer’s equiva- 
lent of the tariff. It is the only fair way to even things up.” 

The farmers who asked for “parity” prices did have a legitimate 
complaint. The protective tariff injured them more than they knew. 
By reducing industrial imports it also reduced American farm exports, 
because it prevented foreign nations from getting the dollar exchange 
needed for taking our agricultural products. And it provoked retalia- 
tory tariffs in other countries. Nonetheless, the argument we have just 
quoted will not stand examination. It is wrong even in its implied 
statement of the facts. There is no general tariff on all “industrial” 
products or on all nonfarm products. There are scores of domestic 
industries or of exporting industries that have no tariff protection. If 
the city worker has to pay a higher price for woolen blankets or over- 
coats because of a tariff, is he “compensated” by having to pay a 
higher price also for cotton clothing and for foodstuffs? Or is he 
merely being robbed twice? 

Let us even it all out, say some, by giving equal “protection” to 
everybody. But that is insoluble and impossible. Even if we assume 
that the problem could be solved technically — a tariff for A, an indus- 
trialist subject to foreign competition; a subsidy for B, an industrialist 
who exports Inis product — it would be impossible to protect or to 
subsidize everybody “fairly” or equally. We should have to give every- 
one the same percentage (or would it be the same dollar amount?) of 
tariff protection or subsidy, and we could never be sure when we were 
duplicating payments to some groups or leaving gaps with others. 

But suppose we could solve this fantastic problem? What would be 
the point? Who gains when everyone equally subsidizes everyone else? 
What is the profit when everyone loses in added taxes precisely what 
he gains by his subsidy or his protection? We should merely have 
added an army of needless bureaucrats to carry out the program, with 
all of them lost to production. 

“Parity” Prices 81 

We could solve the matter simply, on the other hand, by ending 
both the parity-price system and the protective-tariff system. Mean- 
while they do not, in combination, even out anything. The joint sys- 
tem means merely that Farmer A and Industrialist B both profit at the 
expense of Forgotten Man C. 

So the alleged benefits of still another scheme evaporate as soon 
as we trace not only its immediate effects on a special group but its 
long-run effects on everyone. 

Chapter 14 

Saving the X Industry 


T he lobbies of Congress are crowded with representatives of the 
X industry. The X industry is sick. The X industry is dying. It 
must be saved. It can be saved only by a tariff, by higher prices, or by 
a subsidy. If it is allowed to die, workers will be thrown on the streets. 
Their landlords, grocers, butchers, clothing stores, and local motion 
picture theaters will lose business, and depression will spread in ever- 
widening circles. But if the X industry, by prompt action of Congress, 
is saved - — ah then! it will buy equipment from other industries; more 
men will be employed; they will give more business to the butchers, 
bakers, and neon-light makers, and then it is prosperity that will spread 
in ever-widening circles. 

It is obvious that this is merely a generalized form of the case we 
have just been considering. There the X industry was agriculture. But 
there are an endless number of X industries. Two of the most notable 
examples in recent years have been the coal and silver industries. To 
“save silver” Congress did immense harm. One of the arguments for 
the rescue plan was that it would help “the East.” One of its actual 
results was to cause deflation in China, which had been on a silver 
basis, and to force China off that basis. The United States Treasury 


84 Economics in One Lesson 

was compelled to acquire, at ridiculous prices far above the market 
level, hoards of unnecessary silver, and to store it in vaults. The essen- 
tial political aims of the “silver Senators” could have been as well 
achieved, at a fraction of the harm and cost, by the payment of a 
frank subsidy to the mine owners or to their workers; but Congress 
and the country would never have approved a naked steal of this sort 
unaccompanied by the ideological flimflam regarding “silver’s essen- 
tial role in the national currency.” 

To save the coal industry Congress passed the Guffey Act, under 
which the owners of coal mines were not only permitted, but com- 
pelled, to conspire together not to sell below certain minimum prices 
fixed by the government. Though Congress had started out to fix “the” 
price of coal, the government soon found itself (because of different 
sizes, thousands of mines, and shipments to thousands of different des- 
tinations by rail, truck, ship and barge) fixing 350,000 separate prices for 
coal! 1 One effect of this attempt to keep coal prices above the compet- 
itive market level was to accelerate the tendency toward the substitution 
by consumers of other sources of power or heat — such as oil, natural 
gas, and hydroelectric energy. 


But our aim here is not to trace all the results that followed histor- 
ically from efforts to save particular industries, but to trace a few of 
the chief results that must necessarily follow from efforts to save an 

It may be argued that a given industry must be created or pre- 
served for military reasons. It may be argued that a given industry is 
being ruined by taxes or wage rates disproportionate to those of other 
industries; or that, if a public utility, it is being forced to operate at 
rates or charges to the public that do not permit an adequate profit 
margin. Such arguments may or may not be justified in a particular 
case. We are not concerned with them here. We are concerned only 

testimony of Dan H. Wheeler, director of the Bituminous Coal Division. Hearings on 
extension of the Bituminous Coal Act of 1937. 

Saving the X Industry 85 

with a single argument for saving the X industry — that if it is allowed 
to shrink in size or perish through the forces of free competition 
(always, by spokesmen for the industry, designated in such cases as a 
laisse^faire, anarchic, cutthroat, dog-eat-dog, law-of-the-jungle compe- 
tition) it will pull down the general economy with it, and that if it is 
artificially kept alive it will help everybody else. 

What we are talking about here is nothing else but a generalized 
case of the argument put forward for “parity” prices for farm prod- 
ucts or for tariff protection for any number of X industries. The argu- 
ment against artificially higher prices applies, of course, not only to 
farm products but to any other product, just as the reasons we have 
found for opposing tariff protection for one industry apply to any 

But there are always any number of schemes for saving X industries. 
There are two main types of such proposals in addition to those we 
have already considered, and we shall take a brief glance at them. One 
is to contend that the X industry is already “overcrowded,” and to try 
to prevent other firms or workers from getting into it. The other is to 
argue that the X industry needs to be supported by a direct subsidy 
from the government. 

Now if the X industry is really overcrowded as compared with 
other industries it will not need any coercive legislation to keep out 
new capital or new workers. New capital does not rush into industries 
that are obviously dying. Investors do not eagerly seek the industries 
that present the highest risks of loss combined with the lowest 
returns. Nor do workers, when they have any better alternative, go 
into industries where the wages are lowest and the prospects for 
steady employment least promising. 

If new capital and new labor are forcibly kept out of the X indus- 
try, however, either by monopolies, cartels, union policy or legislation, 
it deprives this capital and labor of liberty of choice. It forces 
investors to place their money where the returns seem less promising 
to them than in the X industry. It forces workers into industries with 
even lower wages and prospects than they could find in the allegedly 
sick X industry. It means, in short, that both capital and labor are less 

86 Economics in One Lesson 

efficiently employed than they would be if they were permitted to 
make their own free choices. It means, therefore, a lowering of pro- 
duction which must reflect itself in a lower average living standard. 

That lower living standard will be brought about either by lower 
average money wages than would otherwise prevail or by higher aver- 
age living costs, or by a combination of both. (The exact result would 
depend upon the accompanying monetary policy.) By these restrictive 
policies wages and capital returns might indeed be kept higher than 
otherwise within the X industry itself; but wages and capital returns in 
other industries would be forced down lower than otherwise. The X 
industry would benefit only at the expense of the A, B, and C indus- 


Similar results would follow any attempt to save the X industry by 
a direct subsidy out of the public till. This would be nothing more 
than a transfer of wealth or income to the X industry. The taxpayers 
would lose precisely as much as the people in the X industry gained. 
The great advantage of a subsidy, indeed, from the standpoint of the 
public, is that it makes this fact so clear. There is far less opportunity 
for the intellectual obfuscation that accompanies arguments for tariffs, 
minimum-price fixing, or monopolistic exclusion. 

It is obvious in the case of a subsidy that the taxpayers must lose 
precisely as much as the X industry gains. It should be equally clear 
that, as a consequence, other industries must lose what the X industry 
gains. They must pay part of the taxes that are used to support the X 
industry. And consumers, because they are taxed to support the X 
industry, will have that much less income left with which to buy other 
things. The result must be that other industries on the average must 
be smaller than otherwise in order that the X industry may be larger. 

But the result of this subsidy is not merely that there has been a 
transfer of wealth or income, or that other industries have shrunk in 
the aggregate as much as the X industry has expanded. The result is 
also (and this is where the net loss comes in to the nation considered 
as a unit) that capital and labor are driven out of industries in which 

Saving the X Industry 87 

they are more efficiently employed to be diverted to an industry in 
which they are less efficiendy employed. Less wealth is created. The 
average standard of living is lowered compared with what it would 
have been. 


These results are virtually inherent, in fact, in the very arguments 
put forward to subsidize the X industry. The X industry is shrinking 
or dying by the contention of its friends. Why, it may be asked, should 
it be kept alive by artificial respiration? The idea that an expanding 
economy implies that all industries must be simultaneously expanding 
is a profound error. In order that new industries may grow fast 
enough it is necessary that some old industries should be allowed to 
shrink or die. They must do this in order to release the necessary cap- 
ital and labor for the new industries. If we had tried to keep the horse- 
and-buggy trade artificially alive we should have slowed down the 
growth of the automobile industry and all the trades dependent on it. 
We should have lowered the production of wealth and retarded eco- 
nomic and scientific progress. 

We do the same thing, however, when we try to prevent any indus- 
try from dying in order to protect the labor already trained or the cap- 
ital already invested in it. Paradoxical as it may seem to some, it is just 
as necessary to the health of a dynamic economy that dying industries 
be allowed to die as that growing industries be allowed to grow. The 
first process is essential to the second. It is as foolish to try to preserve 
obsolescent industries as to try to preserve obsolescent methods of 
production: this is often, in fact, merely two ways of describing the 
same thing. Improved methods of production must constandy sup- 
plant obsolete methods, if both old needs and new wants are to be 
filled by better commodities and better means. 

Chapter 15 

How the Price System Works 


T he whole argument of this book may be summed up in the state- 
ment that in studying the effects of any given economic proposal 
we must trace not merely the immediate results but the results in the 
long run, not merely the primary consequences but the secondary 
consequences, and not merely the effects on some special group but 
the effects on everyone. It follows that it is foolish and misleading to 
concentrate our attention merely on some special point — to examine, 
for example, merely what happens in one industry without consider- 
ing what happens in all. But it is precisely from the persistent and lazy 
habit of thinking only of some particular industry or process in isola- 
tion that the major fallacies of economics stem. These fallacies per- 
vade not merely the arguments of the hired spokesmen of special 
interests, but the arguments even of some economists who pass as 

It is on the fallacy of isolation, at bottom, that the “production- 
for-use-and-not-for-profit” school is based, with its attack on the 
allegedly vicious “price system.” The problem of production, say the 
adherents of this school, is solved. (This resounding error, as we shall 
see, is also the starting point of most currency cranks and share-the- 
wealth charlatans.) The problem of production is solved. The scientists, 


90 Economics in One Lesson 

the efficiency experts, the engineers, the technicians, have solved it. 
They could turn out almost anything you cared to mention in huge 
and practically unlimited amounts. But, alas, the world is not ruled by 
the engineers, thinking only of production, but by the businessmen, 
thinking only of profit. The businessmen give their orders to the 
engineers, instead of vice versa. These businessmen will turn out any 
object as long as there is a profit in doing so, but the moment there is 
no longer a profit in making that article, the wicked businessmen will 
stop making it, though many people’s wants are unsatisfied, and the 
world is crying for more goods. 

There are so many fallacies in this view that they cannot all be dis- 
entangled at once. But the central error, as we have hinted, comes 
from looking at only one industry, or even at several industries in turn, 
as if each of them existed in isolation. Each of them in fact exists in 
relation to all the others, and every important decision made in it is 
affected by and affects the decisions made in all the others. 

We can understand this better if we understand the basic problem 
that business collectively has to solve. To simplify this as much as pos- 
sible, let us consider the problem that confronts a Robinson Crusoe on 
his desert island. His wants at first seem endless. He is soaked with rain; 
he shivers from cold; he suffers from hunger and thirst. He needs 
everything: drinking water, food, a roof over his head, protection from 
animals, a fire, a soft place to lie down. It is impossible for him to sat- 
isfy all these needs at once; he has not the time, energy, or resources. 
He must attend immediately to the most pressing need. He suffers 
most, say, from thirst. He hollows out a place in the sand to collect rain 
water, or builds some crude receptacle. When he has provided for only 
a small water supply, however, he must turn to finding food before he 
tries to improve this. He can try to fish; but to do this he needs either 
a hook and line, or a net, and he must set to work on these. But every- 
thing he does delays or prevents him from doing something else only 
a little less urgent. He is faced constantly by the problem of alternative 
applications of his time and labor. 

A Swiss Family Robinson, perhaps, finds this problem a little eas- 
ier to solve. It has more mouths to feed, but it also has more hands 

How the Price System Works 91 

to work for them. It can practice division and specialization of labor. 
The father hunts; the mother prepares the food; the children collect 
firewood. But even the family cannot afford to have one member of 
it doing endlessly the same thing, regardless of the relative urgency 
of the common need he supplies and the urgency of other needs still 
unfilled. When the children have gathered a certain pile of firewood, 
they cannot be used simply to increase the pile. It is soon time for 
one of them to be sent, say, for more water. The family too has the 
constant problem of choosing among alternative applications of labor, 
and, if it is lucky enough to have acquired guns, fishing tackle, a boat, 
axes, saws, and so on, of choosing among alternative applications of 
labor and capital. It would be considered unspeakably silly for the 
wood-gathering member of the family to complain that they could 
gather more firewood if his brother helped him all day, instead of 
getting the fish that were needed for the family dinner. It is recog- 
nized clearly in the case of an isolated individual or family that one 
occupation can expand only at the expense of all other occupations. 

Elementary illustrations like this are sometimes ridiculed as “Cru- 
soe economics.” Unfortunately, they are ridiculed most by those who 
most need them, who fail to understand the particular principle illus- 
trated even in this simple form, or who lose track of that principle 
completely when they come to examine the bewildering complications 
of a great modern economic society. 


Let us now turn to such a society. How is the problem of alterna- 
tive applications of labor and capital, to meet thousands of different 
needs and wants of different urgencies, solved in such a society? It is 
solved precisely through the price system. It is solved through the 
constantly changing interrelationships of costs of production, prices, 
and profits. 

Prices are fixed through the relationship of supply and demand, 
and in turn affect supply and demand. When people want more of an 
article, they offer more for it. The price goes up. This increases the prof- 
its of those who make the article. Because it is now more profitable to 

92 Economics in One Lesson 

make that article than others, the people already in the business expand 
their production of it, and more people are attracted to the business. 
This increased supply then reduces the price and reduces the profit 
margin, until the profit margin on that article once more falls to the 
general level of profits (relative risks considered) in other industries. 
Or the demand for that article may fall; or the supply of it may be 
increased to such a point that its price drops to a level where there is 
less profit in making it than in making other articles; or perhaps there 
is an actual loss in making it. In this case the “marginal” producers, 
that is, the producers who are least efficient, or whose costs of pro- 
duction are highest, will be driven out of business altogether. The 
product will now be made only by the more efficient producers who 
operate on lower costs. The supply of that commodity will also drop, 
or will at least cease to expand. This process is the origin of the belief 
that prices are determined by costs of production. The doctrine, 
stated in this form, is not true. Prices are determined by supply and 
demand, and demand is determined by how intensely people want a 
commodity and what they have to offer in exchange for it. It is true 
that supply is in part determined by costs of production. What a com- 
modity has cost to produce in the past cannot determine its value. That 
will depend on the present relationship of supply and demand. But the 
expectations of businessmen concerning what a commodity will cost 
to produce in the future, and what its future price will be, will deter- 
mine how much of it will be made. This will affect future supply. 
There is therefore a constant tendency for the price of a commodity 
and its marginal cost of production to equal each other, but not 
because that marginal cost of production directly determines the 

The private enterprise system, then, might be compared to thou- 
sands of machines, each regulated by its own quasi-automatic gover- 
nor, yet with these machines and their governors all interconnected 
and influencing each other, so that they act in effect like one great 
machine. Most of us must have noticed the automatic “governor” on 
a steam engine. It usually consists of two balls or weights which work 
by centrifugal force. As the speed of the engine increases, these balls 

How the Price System Works 93 

fly away from the rod to which they are attached and so automatically 
narrow or close off a throtde valve which regulates the intake of 
steam and thus slows down the engine. If the engine goes too slowly, 
on the other hand, the balls drop, widen the throtde valve, and 
increase the engine’s speed. Thus every departure from the desired 
speed itself sets in motion the forces that tend to correct that depar- 

It is precisely in this way that the relative supply of thousands of 
different commodities is regulated under the system of competitive 
private enterprise. When people want more of a commodity, their 
competitive bidding raises its price. This increases the profits of the 
producers who make that product. This stimulates them to increase 
their production. It leads others to stop making some of the products 
they previously made, and turn to making the product that offers 
them the better return. But this increases the supply of that commod- 
ity at the same time that it reduces the supply of some other com- 
modities. The price of that product therefore falls in relation to the 
price of other products, and the stimulus to the relative increase in its 
production disappears. 

In the same way, if the demand falls off for some product, its price 
and the profit in making it go lower, and its production declines. 

It is this last development that scandalizes those who do not under- 
stand the “price system” they denounce. They accuse it of creating 
scarcity. Why, they ask indignantly, should manufacturers cut off the 
production of shoes at the point where it becomes unprofitable to pro- 
duce any more? Why should they be guided merely by their own prof- 
its? Why should they be guided by the market? Why do they not pro- 
duce shoes to the “full capacity of modern technical processes”? The 
price system and private enterprise, conclude the “production-for-use” 
philosophers, are merely a form of “scarcity economics.” 

These questions and conclusions stem from the fallacy of looking 
at one industry in isolation, of looking at the tree and ignoring the for- 
est. Up to a certain point it is necessary to produce shoes. But it is also 
necessary to produce coats, shirts, trousers, homes, plows, shovels, 
factories, bridges, milk, and bread. It would be idiotic to go on piling 

94 Economics in One Lesson 

up mountains of surplus shoes, simply because we could do it, while 
hundreds of more urgent needs went unfilled. 

Now in an economy in equilibrium, a given industry can expand 
only at the expense of other industries. For at any moment the factors of pro- 
duction are limited. One industry can be expanded only by diverting to 
it labor, land, and capital that would otherwise be employed in other 
industries. And when a given industry shrinks, or stops expanding its 
output, it does not necessarily mean that there has been any net decline 
in aggregate production. The shrinkage at that point may have merely 
released labor and capital to pertnit the expansion of other industries. It is erro- 
neous to conclude, therefore, that a shrinkage of production in one 
line necessarily means a shrinkage in total production. 

Everything, in short, is produced at the expense of forgoing some- 
thing else. Costs of production themselves, in fact, might be defined 
as the things that are given up (the leisure and pleasures, the raw mate- 
rials with alternative potential uses) in order to create the thing that is 

It follows that it is just as essential for the health of a dynamic 
economy that dying industries should be allowed to die as that grow- 
ing industries should be allowed to grow. For the dying industries 
absorb labor and capital that should be released for the growing 
industries. It is only the much vilified price system that solves the 
enormously complicated problem of deciding precisely how much 
of tens of thousands of different commodities and services should 
be produced in relation to each other. These otherwise bewildering 
equations are solved quasi-automatically by the system of prices, 
profits, and costs. They are solved by this system incomparably bet- 
ter than any group of bureaucrats could solve them. For they are 
solved by a system under which each consumer makes his own 
demand and casts a fresh vote, or a dozen fresh votes, every day; 
whereas bureaucrats would try to solve it by having made for the 
consumers, not what the consumers themselves wanted, but what 
the bureaucrats decided was good for them. 

Yet though the bureaucrats do not understand the quasi-automatic 
system of the market, they are always disturbed by it. They are always 

How the Price System Works 95 

trying to improve it or correct it, usually in the interests of some wail- 
ing pressure group. What some of the results of their intervention is, 
we shall examine in succeeding chapters. 

Chapter 16 

^Stabilising 55 Commodities 


A ttempts to lift the prices of particular commodities permanently 
above their natural market levels have failed so often, so disas- 
trously, and so notoriously that sophisticated pressure groups, and the 
bureaucrats upon whom they apply the pressure, seldom openly avow 
that aim. Their stated aims, particularly when they are first proposing 
that the government intervene, are usually more modest, and more 

They have no wish, they declare, to raise the price of commodity X 
permanendy above its natural level. That, they concede, would be unfair 
to consumers. But it is now obviously selling far below its natural level. 
The producers cannot make a living. Unless we act prompdy, they will 
be thrown out of business. Then there will be a real scarcity, and con- 
sumers will have to pay exorbitant prices for the commodity. The appar- 
ent bargains that the consumers are now getting will cost them dear in 
the end. For the present “temporary” low price cannot last. But we can- 
not afford to wait for so-called natural market forces, or for the “blind” 
law of supply and demand, to correct the situation. For by that time 
the producers will be ruined and a great scarcity will be upon us. The 
government must act. All that we really want to do is to correct these 
violent, senseless fluctuations in price. We are not trying to boost the price; 
we are only trying to stabilise it. 


98 Economics in One Lesson 

There are several methods by which it is commonly proposed to 
do this. One of the most frequent is government loans to farmers to 
enable them to hold their crops off the market. 

Such loans are urged in Congress for reasons that seem very plau- 
sible to most listeners. They are told that the farmers’ crops are all 
dumped on the market at once, at harvest time; that this is precisely 
the time when prices are lowest, and that speculators take advantage 
of this to buy the crops themselves and hold them for higher prices 
when food gets scarcer again. Thus it is urged that the farmers suffer, 
and that they, rather than the speculators, should get the advantage of 
the higher average price. 

This argument is not supported by either theory or experience. 
The much-reviled speculators are not the enemy of the farmer; they 
are essential to his best welfare. The risks of fluctuating farm prices 
must be borne by somebody; they have in fact been borne in modern 
times chiefly by the professional speculators. In general, the more 
competently the latter act in their own interest as speculators, the 
more they help the farmer. For speculators serve their own interest 
precisely in proportion to their ability to foresee future prices. But the 
more accurately they foresee future prices the less violent or extreme 
are the fluctuations in prices. 

Even if farmers had to dump their whole crop of wheat on the 
market in a single month of the year, therefore, the price in that 
month would not necessarily be below the price at any other month 
(apart from an allowance for the costs of storage). For speculators, in 
the hope of making a profit, would do most of their buying at that 
time. They would keep on buying until the price rose to a point where 
they saw no further opportunity of future profit. They would sell 
whenever they thought there was a prospect of future loss. The result 
would be to stabilize the price of farm commodities the year round. 

It is precisely because a professional class of speculators exists to 
take these risks that farmers and millers do not need to take them. 
The latter can protect themselves through the markets. Under normal 
conditions, therefore, when speculators are doing their job well, the 

‘Stabilising” Commodities 99 

profits of farmers and millers will depend chiefly on their skill and 
industry in farming or milling, and not on market fluctuations. 

Actual experience shows that on the average the price of wheat and 
other nonperishable crops remains the same all year round except for 
an allowance for storage and insurance charges. In fact, some careful 
investigations have shown that the average monthly rise after harvest 
time has not been quite sufficient to pay such storage charges, so that 
the speculators have actually subsidized the farmers. This, of course, 
was not their intention: it has simply been the result of a persistent ten- 
dency to overoptimism on the part of speculators. (This tendency 
seems to affect entrepreneurs in most competitive pursuits: as a class 
they are constantly, contrary to intention, subsidizing consumers. This 
is particularly true wherever the prospects of big speculative gains exist. 
Just as the subscribers to a lottery, considered as a unit, lose money 
because each is unjustifiably hopeful of drawing one of the few spec- 
tacular prizes, so it has been calculated that the total labor and capital 
dumped into prospecting for gold or oil has exceeded the total value of 
the gold or oil extracted.) 


The case is different, however, when the State steps in and either 
buys the farmers’ crops itself or lends them the money to hold the 
crops off the market. This is sometimes done in the name of main- 
taining what is plausibly called an “ever-normal granary.” But the his- 
tory of prices and annual carryovers of crops shows that this func- 
tion, as we have seen, is already being well performed by the privately 
organized free markets. When the government steps in, the “ever- 
normal granary” becomes in fact an ever-political granary. The 
farmer is encouraged, with the taxpayers’ money, to withhold his 
crops excessively. Because they wish to make sure of retaining the 
farmer’s vote, the politicians who initiate the policy, or the bureaucrats 
who carry it out, always place the so-called “fair” price for the farmer’s 
product above the price that supply and demand conditions at the 
time justify. This leads to a falling off in buyers. The “ever-normal 
granary” therefore tends to become an ever-abnormal granary. 

100 Economics in One Lesson 

Excessive stocks are held off the market. The effect of this is to 
secure a higher price temporarily than would otherwise exist, but to 
do so only by bringing about later on a much lower price than would 
otherwise have existed. For the artificial shortage built up this year by 
withholding part of a crop from the market means an artificial sur- 
plus the next year. 

It would carry us too far afield to describe in detail what actually 
happened when this program was applied, for example, to American 
cotton. We piled up an entire year’s crop in storage. We destroyed the 
foreign market for our cotton. We stimulated enormously the growth 
of cotton in other countries. Though these results had been predicted 
by opponents of the restriction and loan policy, when they actually 
happened the bureaucrats responsible for the result merely replied 
that they would have happened anyway. 

For the loan policy is usually accompanied by, or inevitably leads 
to, a policy of restricting production — i.e., a policy of scarcity. In 
nearly every effort to “stabilEe” the price of a commodity, the inter- 
ests of the producers have been put first. The real object is an imme- 
diate boost of prices. To make this possible, a proportional restriction 
of output is usually placed on each producer subject to the control. 
This has several immediately bad effects. Assuming that the control 
can be imposed on an international scale, it means that total world 
production is cut. The world’s consumers are able to enjoy less of that 
product than they would have enjoyed without restriction. The world 
is just that much poorer. Because consumers are forced to pay higher 
prices than otherwise for that product, they have just that much less 
to spend on other products. 


The restrictionists usually reply that this drop in output is what 
happens anyway under a market economy. But there is a fundamental 
difference, as we have seen in the preceding chapter. In a competitive 
market economy, it is the high-cost producers, the inefficient producers, 
that are driven out by a fall in price. In the case of an agricultural com- 
modity it is the least competent farmers, or those with the poorest 

‘Stabilising” Commodities 101 

equipment, or those working the poorest land, that are driven out. 
The most capable farmers on the best land do not have to restrict 
their production. On the contrary, if the fall in price has been symp- 
tomatic of a lower average cost of production, reflected through an 
increased supply, then the driving out of the marginal farmers on the 
marginal land enables the good farmers on the good land to expand 
their production. So there may be, in the long run, no reduction what- 
ever in the output of that commodity. And the product is then pro- 
duced and sold at a permanently lower price. 

If that is the outcome, then the consumers of that commodity will 
be as well supplied with it as they were before. But, as a result of the 
lower price, they will have money left over, which they did not have 
before, to spend on other things. The consumers, therefore, will obvi- 
ously be better off. But their increased spending in other directions will 
give increased employment in other lines, which will then absorb the 
former marginal farmers in occupations in which their efforts will be 
more lucrative and more efficient. 

A uniform proportional restriction (to return to our government 
intervention scheme) means, on the one hand, that the efficient low- 
cost producers are not permitted to turn out all the output they can at 
a low price. It means, on the other hand, that the inefficient high-cost 
producers are artificially kept in business. This increases the average 
cost of producing the product. It is being produced less efficiently 
than otherwise. The inefficient marginal producer thus artificially kept 
in that line of production continues to tie up land, labor, and capital 
that could much more profitably and efficiently be devoted to other 

There is no point in arguing that as a result of the restriction 
scheme at least the price of farm products has been raised and “the 
farmers have more purchasing power.” They have got it only by tak- 
ing just that much purchasing power away from the city buyer. (We 
have been over all this ground before in our analysis of “parity” prices.) 
To give farmers money for restricting production, or to give them the 
same amount of money for an artificially restricted production, is no 
different from forcing consumers or taxpayers to pay people for doing 

102 "Economics in One Lesson 

nothing at all. In each case the beneficiaries of such policies get “pur- 
chasing power.” But in each case someone else loses an exactly equiv- 
alent amount. The net loss to the community is the loss of produc- 
tion, because people are supported for not producing. Because there 
is less for everybody, because there is less to go around, real wages and 
real incomes must decline either through a fall in their monetary 
amount or through higher living costs. 

But if an attempt is made to keep up the price of an agricultural 
commodity and no artificial restriction of output is imposed, unsold 
surpluses of the overpriced commodity continue to pile up until the 
market for that product finally collapses to a far greater extent than if 
the control program had never been put into effect. Or producers 
outside the restriction program, stimulated by the artificial rise in 
price, expand their own production enormously. This is what hap- 
pened to the British rubber restriction and the American cotton 
restriction programs. In either case the collapse of prices finally goes 
to catastrophic lengths that would never have been reached without 
the restriction scheme. The plan that started out so bravely to “stabi- 
lize” prices and conditions brings incomparably greater instability 
than the free forces of the market could possibly have brought. 

Of course the international commodity controls that are being 
proposed now, we are told, are going to avoid all these errors. This time 
prices are going to be fixed that are “fair” not only for producers but 
for consumers. Producing and consuming nations are going to agree 
on just what these fair prices are, because no one will be unreasonable. 
Fixed prices will necessarily involve “just” allotments and allocations 
for production and consumption as among nations, but only cynics 
will anticipate any unseemly international disputes regarding these. 
Finally, by the greatest miracle of all, this postwar world of superin- 
ternational controls and coercions is also going to be a world of 
“free” international trade! 

just what the government planners mean by free trade in this con- 
nection I am not sure, but we can be sure of some of the things they 
do not mean. They do not mean the freedom of ordinary people to 
buy and sell, lend and borrow, at whatever prices or rates they like and 

‘Stabilising” Commodities 103 

wherever they find it most profitable to do so. They do not mean the 
freedom of the plain citizen to raise as much of a given crop as he 
wishes, to come and go at will, to setde where he pleases, to take his 
capital and other belongings with him. They mean, I suspect, the free- 
dom of bureaucrats to setde these matters for him. And they tell him 
that if he docilely obeys the bureaucrats he will be rewarded by a rise 
in his living standards. But if the planners succeed in tying up the idea 
of international cooperation with the idea of increased State domina- 
tion and control over economic life, the international controls of the 
future seem only too likely to follow the pattern of the past, in which 
case the plain man’s living standards will decline with his liberties. 

Chapter 17 

Government Price-Fixing 


W e have seen what some of the effects are of governmental 
efforts to fix the prices of commodities above the levels to 
which free markets would otherwise have carried them. Let us now 
look at some of the results of government attempts to hold the prices 
of commodities below their natural market levels. 

The latter attempt is made in our day by nearly all governments in 
wartime. We shall not examine here the wisdom of wartime price-fix- 
ing. The whole economy, in total war, is necessarily dominated by the 
State, and the complications that would have to be considered would 
carry us too far beyond the main question with which this book is 
concerned. But wartime price-fixing, wise or not, is in almost all coun- 
tries continued for at least long periods after the war is over, when the 
original excuse for starting it has disappeared. 

Let us first see what happens when the government tries to keep 
the price of a single commodity, or a small group of commodities, 
below the price that would be set in a free competitive market. 

When the government tries to fix maximum prices for only a few 
items, it usually chooses certain basic necessities, on the ground that it 
is most essential that the poor be able to obtain these at a “reasonable” 


106 Economics in One Lesson 

cost. Let us say that the items chosen for this purpose are bread, milk, 
and meat. 

The argument for holding down the price of these goods will run 
something like this. If we leave beef (let us say) to the mercies of the 
free market, the price will be pushed up by competitive bidding so that 
only the rich will get it. People will get beef not in proportion to their 
need, but only in proportion to their purchasing power. If we keep the 
price down, everyone will get his fair share. 

The first thing to be noticed about this argument is that if it is 
valid the policy adopted is inconsistent and timorous. For if purchas- 
ing power rather than need determines the distribution of beef at a 
market price of 65 cents a pound, it would also determine it, though 
perhaps to a slightly smaller degree, at, say, a legal “ceiling” price of 
50 cents a pound. The purchasing-power-rather-than-need argument, 
in fact, holds as long as we charge anything for beef whatever. It 
would cease to apply only if beef were given away. 

But schemes for maximum price-fixing usually begin as efforts to 
“keep the cost of living from rising.” And so their sponsors uncon- 
sciously assume that there is something peculiarly “normal” or sacro- 
sanct about the market price at the moment from which their control 
starts. That starting price is regarded as “reasonable,” and any price 
above that as “unreasonable,” regardless of changes in the conditions 
of production or demand since that starting price was first estab- 


In discussing this subject, there is no point in assuming a price 
control that would fix prices exactly where a free market would place 
them in any case. That would be the same as having no price control 
at all. We must assume that the purchasing power in the hands of the 
public is greater than the supply of goods available, and that prices 
are being held down by the government below the levels to which a 
free market would put them. 

Now we cannot hold the price of any commodity below its market 
level without in time bringing about two consequences. The first is to 

Government Price-Fixing 107 

increase the demand for that commodity. Because the commodity is 
cheaper, people are both tempted to buy, and can afford to buy, more 
of it. The second consequence is to reduce the supply of that com- 
modity. Because people buy more, the accumulated supply is more 
quickly taken from the shelves of merchants. But in addition to this, 
production of that commodity is discouraged. Profit margins are 
reduced or wiped out. The marginal producers are driven out of busi- 
ness. Even the most efficient producers may be called upon to turn out 
their product at a loss. This happened in the war when slaughterhouses 
were required by the Office of Price Administration to slaughter and 
process meat for less than the cost to them of cattle on the hoof and 
the labor of slaughter and processing. 

If we did nothing else, therefore, the consequence of fixing a max- 
imum price for a particular commodity would be to bring about a 
shortage of that commodity. But this is precisely the opposite of what 
the government regulators originally wanted to do. For it is the very 
commodities selected for maximum price-fixing that the regulators 
most want to keep in abundant supply. But when they limit the wages 
and the profits of those who make these commodities, without also 
limiting the wages and profits of those who make luxuries or semi- 
luxuries, they discourage the production of the price-controlled 
necessities while they relatively stimulate the production of less essen- 
tial goods. 

Some of these consequences in time become apparent to the reg- 
ulators, who then adopt various other devices and controls in an 
attempt to avert them. Among these devices are rationing, cost-con- 
trol, subsidies, and universal price-fixing. Let us look at each of these 
in turn. 

When it becomes obvious that a shortage of some commodity is 
developing as a result of a price fixed below the market, rich con- 
sumers are accused of taking “more than their fair share;” or, if it is 
a raw material that enters into manufacture, individual firms are 
accused of “hoarding” it. The government then adopts a set of rules 
concerning who shall have priority in buying that commodity, or to 
whom and in what quantities it shall be allocated, or how it shall be 

108 Economics in One Lesson 

rationed. If a rationing system is adopted, it means that each con- 
sumer can have only a certain maximum supply, no matter how much 
he is willing to pay for more. 

If a rationing system is adopted, in brief, it means that the govern- 
ment adopts a double price system, or a dual currency system, in 
which each consumer must have a certain number of coupons or 
“points” in addition to a given amount of ordinary money. In other 
words, the government tries to do through rationing part of the job 
that a free market would have done through prices. I say only part of 
the job, because rationing merely limits the demand without also stim- 
ulating the supply, as a higher price would have done. 

The government may try to assure supply through extending its 
control over the costs of production of a commodity. To hold down 
the retail price of beef, for example, it may fix the wholesale price of 
beef, the slaughterhouse price of beef, the price of live cattle, the 
price of feed, the wages of farmhands. To hold down the delivered 
price of milk, it may try to fix the wages of milk-wagon drivers, the 
price of containers, the farm price of milk, the price of feedstuffs. To 
fix the price of bread, it may fix the wages in bakeries, the price of 
flour, the profits of millers, the price of wheat, and so on. 

But as the government extends this price-fixing backwards, it 
extends at the same time the consequences that originally drove it to 
this course. Assuming that it has the courage to fix these costs, and is 
able to enforce its decisions, then it merely, in turn, creates shortages 
of the various factors — labor, feedstuffs, wheat, or whatever — that 
enter into the production of the final commodities. Thus the govern- 
ment is driven to controls in ever-widening circles, and the final con- 
sequence will be the same as that of universal price-fixing. 

The government may try to meet this difficulty through subsidies. 
It recognizes, for example, that when it keeps the price of milk or but- 
ter below the level of the market, or below the relative level at which 
it fixes other prices, a shortage may result because of lower wages or 
profit margins for the production of milk or butter as compared with 
other commodities. Therefore the government attempts to compen- 
sate for this by paying a subsidy to the milk and butter producers. 

Government Price-Fixing 109 

Passing over the administrative difficulties involved in this, and assum- 
ing that the subsidy is just enough to assure the desired relative pro- 
duction of milk and butter, it is clear that, though the subsidy is paid 
to producers, those who are really being subsidized are the consumers. 
For the producers are on net balance getting no more for their milk 
and butter than if they had been allowed to charge the free market 
price in the first place; but the consumers are getting their milk and 
butter at a great deal below the free market price. They are being sub- 
sidized to the extent of the difference — that is, by the amount of sub- 
sidy paid ostensibly to the producers. 

Now unless the subsidized commodity is also rationed, it is those 
with the most purchasing power that can buy most of it. This means 
that they are being subsidized more than those with less purchasing 
power. Who subsidizes the consumers will depend upon the inci- 
dence of taxation. But men in their role of taxpayers will be subsi- 
dizing themselves in their role of consumers. It becomes a little dif- 
ficult to trace in this maze precisely who is subsidizing whom. What 
is forgotten is that subsidies are paid for by someone, and that no 
method has been discovered by which the community gets something 
for nothing. 


Price-fixing may often appear for a short period to be successful. It 
can seem to work well for a while, particularly in wartime, when it is 
supported by patriotism and a sense of crisis. But the longer it is in 
effect the more its difficulties increase. When prices are arbitrarily held 
down by government compulsion, demand is chronically in excess of sup- 
ply. We have seen that if the government attempts to prevent a short- 
age of a commodity by reducing also the prices of the labor, raw mate- 
rials and other factors that go into its cost of production, it creates a 
shortage of these in turn. But not only will the government, if it pur- 
sues this course, find it necessary to extend price control more and 
more downwards, or “vertically;” it will find it no less necessary to 
extend price control “horizontally.” If we ration one commodity, and 
the public cannot get enough of it, though it still has excess purchasing 

110 Economics in One Lesson 

power, it will turn to some substitute. The rationing of each commod- 
ity as it grows scarce, in other words, must put more and more pressure 
on the unrationed commodities that remain. If we assume that the gov- 
ernment is successful in its efforts to prevent black markets (or at least 
prevents them from developing on a sufficient scale to nullify its legal 
prices), continued price control must drive it to the rationing of more 
and more commodities. This rationing cannot stop with consumers. In 
war it did not stop with consumers. It was applied first of all, in fact, in 
the allocation of raw materials to producers. 

The natural consequence of a thoroughgoing overall price control 
which seeks to perpetuate a given historic price level, in brief, must ulti- 
mately be a completely regimented economy. Wages would have to be 
held down as rigidly as prices. Labor would have to be rationed as ruth- 
lessly as raw materials. The end result would be that the government 
would not only tell each consumer precisely how much of each com- 
modity he could have; it would tell each manufacturer precisely what 
quantity of each raw material he could have and what quantity of labor. 
Competitive bidding for workers could no more be tolerated than com- 
petitive bidding for materials. The result would be a petrified totalitarian 
economy, with every business firm and every worker at the mercy of the 
government, and with a final abandonment of all the traditional liberties 
we have known. For as Alexander Hamilton pointed out in the Federalist 
Papers a century and a half ago, “A power over a man’s subsistence 
amounts to a power over his will.” 


These are the consequences of what might be described as “per- 
fect,” long-continued, and “nonpolitical” price control. As was so 
amply demonstrated in one country after another, particularly in 
Europe during and after World War II, some of the more fantastic 
errors of the bureaucrats were mitigated by the black market. It was a 
common story from many European countries that people were able 
to get enough to stay alive only by patronizing the black market. In 
some countries the black market kept growing at the expense of the 
legally recognized fixed-price market until the former became, in 

Government Price-Fixing 111 

effect, the market. By nominally keeping the price ceilings, however, 
the politicians in power tried to show that their hearts, if not their 
enforcement squads, were in the right place. 

Because the black market, however, finally supplanted the legal 
price-ceiling market, it must not be supposed that no harm was done. 
The harm was both economic and moral. During the transition period 
the large, long-established firms, with a heavy capital investment and 
a great dependence upon the retention of public goodwill, are forced 
to restrict or discontinue production. Their place is taken by fly-by- 
night concerns with little capital and little accumulated experience in 
production. These new firms are inefficient compared with those they 
displace; they turn out inferior and dishonest goods at much higher 
production costs than the older concerns would have required for 
continuing to turn out their former goods. A premium is put on dis- 
honesty. The new firms owe their very existence or growth to the fact 
that they are willing to violate the law; their customers conspire with 
them; and as a natural consequence demorali 2 ation spreads into all 
business practices. 

It is seldom, moreover, that any honest effort is made by the 
price-fixing authorities merely to preserve the level of prices existing 
when their efforts began. They declare that their intention is to “hold 
the line.” Soon, however, under the guise of “correcting inequities” 
or “social injustices,” they begin a discriminatory price-fixing which 
gives most to those groups that are politically powerful and least to 
other groups. 

As political power today is most commonly measured by votes, the 
groups that the authorities most often attempt to favor are workers 
and farmers. At first it is contended that wages and living costs are not 
connected; that wages can easily be lifted without lifting prices. When 
it becomes obvious that wages can be raised only at the expense of 
profits, the bureaucrats begin to argue that profits were already too 
high anyway, and that lifting wages and holding prices will still permit 
“a fair profit.” As there is no such thing as a uniform rate of profit, as 
profits differ with each concern, the result of this policy is to drive the 
least profitable concerns out of business altogether, and to discourage 

112 "Economics in One Lesson 

or stop the production of certain items. This means unemployment, 
a shrinkage in production and a decline in living standards. 


What lies at the base of the whole effort to fix maximum prices? 
There is first of all a misunderstanding of what it is that has been caus- 
ing prices to rise. The real cause is either a scarcity of goods or a surplus 
of money. Legal price ceilings cannot cure either. In fact, as we have just 
seen, they merely intensify the shortage of goods. What to do about the 
surplus of money will be discussed in a later chapter. But one of the 
errors that lies behind the drive for price-fixing is the chief subject of 
this book. Just as the endless plans for raising prices of favored com- 
modities are the result of thinking of the interests only of the produc- 
ers immediately concerned, and forgetting the interests of consumers, so 
the plans for holding down prices by legal edict are the result of thinking 
of the interests of people only as consumers and forgetting their inter- 
ests as producers. And the political support for such policies springs 
from a similar confusion in the public mind. People do not want to pay 
more for milk, butter, shoes, furniture, rent, theater tickets, or diamonds. 
Whenever any of these items rises above its previous level the consumer 
becomes indignant, and feels that he is being rooked. 

The only exception is the item he makes himself: here he under- 
stands and appreciates the reason for the rise. But he is always likely 
to regard his own business as in some way an exception. “Now my 
own business,” he will say, “is peculiar, and the public does not under- 
stand it. Labor costs have gone up; raw material prices have gone up; 
this or that raw material is no longer being imported, and must be 
made at a higher cost at home. Moreover, the demand for the prod- 
uct has increased, and the business should be allowed to charge the 
prices necessary to encourage its expansion to supply this demand.” 
And so on. Everyone as consumer buys a hundred different products; 
as producer he makes, usually, only one. He can see the inequity in 
holding down the price of that. And just as each manufacturer wants a 
higher price for his particular product, so each worker wants a higher 
wage or salary. Each can see as producer that price control is restricting 

Government Price-Fixing 113 

production in his line. But nearly everyone refuses to generalize this 
observation, for it means that he will have to pay more for the prod- 
ucts of others. 

Each one of us, in brief, has a multiple economic personality. Each 
one of us is producer, taxpayer, consumer. The policies he advocates 
depend upon the particular aspect under which he thinks of himself at 
the moment. For he is sometimes Dr. Jekyll and sometimes Mr. Hyde. 
As a producer he wants inflation (thinking chiefly of his own services 
or product); as a consumer he wants price ceilings (thinking chiefly of 
what he has to pay for the products of others). As a consumer he may 
advocate or acquiesce in subsidies; as a taxpayer he will resent paying 
them. Each person is likely to think that he can so manage the politi- 
cal forces that he can benefit from the subsidy more than he loses from 
the tax, or benefit from a rise for his own product (while his raw mate- 
rial costs are legally held down) and at the same time benefit as a con- 
sumer from price control. But the overwhelming majority will be 
deceiving themselves. For not only must there be at least as much loss 
as gain from this political manipulation of prices; there must be a great 
deal more loss than gain, because price-fixing discourages and disrupts 
employment and production. 

Chapter 18 

Minimum Wage Laws 


W e have already seen some of the harmful results of arbitrary 
governmental efforts to raise the price of favored commodi- 
ties. The same sort of harmful results follow efforts to raise wages 
through minimum wage laws. This ought not to be surprising; for a 
wage is, in fact, a price. It is unfortunate for clarity of economic think- 
ing that the price of labor’s services should have received an entirely 
different name from other prices. This has prevented most people 
from recognizing that the same principles govern both. 

Thinking has become so emotional and so politically biased on the 
subject of wages that in most discussions of them the plainest princi- 
ples are ignored. People who would be among the first to deny that 
prosperity could be brought about by artificially boosting prices, peo- 
ple who would be among the first to point out that minimum price 
laws might be most harmful to the very industries they were designed 
to help, will nevertheless advocate minimum wage laws, and denounce 
opponents of them, without misgivings. 

Yet it ought to be clear that a minimum wage law is, at best, a limited 
weapon for combating the evil of low wages, and that the possible good 
to be achieved by such a law can exceed the possible harm only in pro- 
portion as its aims are modest. The more ambitious such a law is, the 


116 Economics in One Lesson 

larger the number of workers it attempts to cover, and the more it 
attempts to raise their wages, the more likely are its harmful effects to 
exceed its good effects. 

The first thing that happens, for example, when a law is passed that 
no one shall be paid less than $30 for a forty-hour week is that no one 
who is not worth $30 a week to an employer will be employed at all. 
You cannot make a man worth a given amount by making it illegal for 
anyone to offer him anything less. You merely deprive him of the 
right to earn the amount that his abilities and situation would permit 
him to earn, while you deprive the community even of the moderate 
services that he is capable of rendering. In brief, for a low wage you 
substitute unemployment. You do harm all around, with no compara- 
ble compensation. 

The only exception to this occurs when a group of workers is 
receiving a wage actually below its market worth. This is likely to hap- 
pen only in special circumstances or localities where competitive 
forces do not operate freely or adequately; but nearly all these special 
cases could be remedied just as effectively, more flexibly, and with far 
less potential harm, by unionization. 

It may be thought that if the law forces the payment of a higher 
wage in a given industry, that industry can then charge higher prices 
for its product, so that the burden of paying the higher wage is merely 
shifted to consumers. Such shifts, however, are not easily made, nor 
are the consequences of artificial wage raising so easily escaped. A 
higher price for the product may not be possible: it may merely drive 
consumers to some substitute. Or, if consumers continue to buy the 
product of the industry in which wages have been raised, the higher 
price will cause them to buy less of it. While some workers in the 
industry will be benefited from the higher wage, therefore, others will 
be thrown out of employment altogether. On the other hand, if the 
price of the product is not raised, marginal producers in the industry 
will be driven out of business; so that reduced production and conse- 
quent unemployment will merely be brought about in another way. 

When such consequences are pointed out, there is a group of peo- 
ple who reply: “Very well; if it is true that the X industry cannot exist 

Minimum Wage Laws 117 

except by paying starvation wages, then it will be just as well if the min- 
imum wage puts it out of existence altogether.” But this brave pro- 
nouncement overlooks the realities. It overlooks, first of all, that con- 
sumers will suffer the loss of that product. It forgets, in the second 
place, that it is merely condemning the people who worked in that 
industry to unemployment. And it ignores, finally, that bad as were the 
wages paid in the X industry, they were the best among all the alterna- 
tives that seemed open to the workers in that industry; otherwise the 
workers would have gone into another. If, therefore, the X industry is 
driven out of existence by a minimum wage law, then the workers pre- 
viously employed in that industry will be forced to turn to alternative 
courses that seemed less attractive to them in the first place. Their 
competition for jobs will drive down the pay offered even in these 
alternative occupations. There is no escape from the conclusion that 
the minimum wage will increase unemployment. 


A nice problem, moreover, will be raised by the relief program 
designed to take care of the unemployment caused by the minimum 
wage law. By a minimum wage of, say, 7 5 cents an hour, we have for- 
bidden anyone to work forty hours in a week for less than $30. Sup- 
pose, now, we offer only $1 8 a week on relief. This means that we have 
forbidden a man to be usefully employed at, say $25 a week, in order 
that we may support him at $18 a week in idleness. We have deprived 
society of the value of his services. We have deprived the man of the 
independence and self-respect that come from self-support, even at a 
low level, and from performing wanted work, at the same time as we 
have lowered what the man could have received by his own efforts. 

These consequences follow as long as the relief payment is a 
penny less than $30. Yet the higher we make the relief payment, the 
worse we make the situation in other respects. If we offer $30 for 
relief, then we offer many men just as much for not working as for 
working. Moreover, whatever the sum we offer for relief, we create a 
situation in which everyone is working only for the difference between 
his wages and the amount of the relief. If the relief is $30 a week, for 

118 Economics in One Lesson 

example, workers offered a wage of $1 an hour, or $40 a week, are in 
fact, as they see it, being asked to work for only $10 a week — for they 
can get the rest without doing anything. 

It may be thought that we can escape these consequences by offer- 
ing “work relief” instead of “home relief;” but we merely change the 
nature of the consequences. “Work relief” means that we are paying 
the beneficiaries more than the open market would pay them for their 
efforts. Only part of their relief wage is for their efforts, therefore (in 
work often of doubtful utility), while the rest is a disguised dole. 

It would probably have been better all around if the government 
in the first place had frankly subsidized their wages on the private 
work they were already doing. We need not pursue this point further, 
as it would carry us into problems not immediately relevant. But the 
difficulties and consequences of relief must be kept in mind when we 
consider the adoption of minimum wage laws or an increase in mini- 
mums already fixed. 


All this is not to argue that there is no way of raising wages. It is 
merely to point out that the apparendy easy method of raising them 
by government fiat is the wrong way and the worst way. 

This is perhaps as good a place as any to point out that what dis- 
tinguishes many reformers from those who cannot accept their pro- 
posals is not their greater philanthropy, but their greater impatience. 
The question is not whether we wish to see everybody as well off as 
possible. Among men of goodwill such an aim can be taken for 
granted. The real question concerns the proper means of achieving it. 
And in trying to answer this we must never lose sight of a few elemen- 
tary truisms. We cannot distribute more wealth than is created. We 
cannot in the long run pay labor as a whole more than it produces. 

The best way to raise wages, therefore, is to raise labor productiv- 
ity. This can be done by many methods: by an increase in capital accu- 
mulation — i.e., by an increase in the machines with which the workers 
are aided; by new inventions and improvements; by more efficient 
management on the part of employers; by more industriousness and 

Minimum Wage Lam 119 

efficiency on the part of workers; by better education and training. 
The more the individual worker produces, the more he increases the 
wealth of the whole community. The more he produces, the more his 
services are worth to consumers, and hence to employers. And the 
more he is worth to employers, the more he will be paid. Real wages 
come out of production, not out of government decrees. 

Chapter 19 

Do Unions Really Raise Wages? 


T he power of labor unions to raise wages over the long run and 
for the whole working population has been enormously exagger- 
ated. This exaggeration is mainly the result of failure to recognize that 
wages are basically determined by labor productivity. It is for this rea- 
son, for example, that wages in the United States were incomparably 
higher than wages in England and Germany all during the decades 
when the “labor movement” in the latter two countries was far more 

In spite of the overwhelming evidence that labor productivity is 
the fundamental determinant of wages, the conclusion is usually for- 
gotten or derided by labor union leaders and by that large group of 
economic writers who seek a reputation as “liberals” by parroting 
them. But this conclusion does not rest on the assumption, as they 
suppose, that employers are uniformly kind and generous men eager 
to do what is right. It rests on the very different assumption that the 
individual employer is eager to increase his own profits to the maxi- 
mum. If people are willing to work for less than they are really worth 
to him, why should he not take the fullest advantage of this? Why 
should he not prefer, for example, to make $1 a week out of a work- 
man rather than see some other employer make $2 a week out of 


122 Economics in One Lesson 

him? And as long as this situation exists, there will be a tendency for 
employers to bid workers up to their full economic worth. 

All this does not mean that unions can serve no useful or legiti- 
mate function. The central function they can serve is to assure that all 
of their members get the true market value of their services. 

For the competition of workers for jobs, and of employers for 
workers, does not work perfectly. Neither individual workers nor indi- 
vidual employers are likely to be fully informed concerning the condi- 
tions of the labor market. An individual worker, without the help of a 
union or a knowledge of “union rates,” may not know the true market 
value of his services to an employer. And he is, individually, in a much 
weaker bargaining position. Mistakes of judgment are far more costly 
to him than to an employer. If an employer mistakenly refuses to hire 
a man from whose services he might have profited, he merely loses the 
net profit he might have made from employing that one man; and he 
may employ a hundred or a thousand men. But if a worker mistakenly 
refuses a job in the belief that he can easily get another that will pay 
him more, the error may cost him dearly. His whole means of liveli- 
hood is involved. Not only may he fail promptly to find another job 
offering more; he may fail for a time to find another job offering 
remotely as much. And time may be the essence of his problem, 
because he and his family must eat. So he may be tempted to take a 
wage that he knows to be below his “real worth” rather than face these 
risks. When an employer’s workers deal with him as a body, however, 
and set a known “standard wage” for a given class of work, they may 
help to equalize bargaining power and the risks involved in mistakes. 

But it is easy, as experience has proved, for unions, particularly 
with the help of one-sided labor legislation which puts compulsions 
solely on employers, to go beyond their legitimate functions, to act 
irresponsibly, and to embrace shortsighted and antisocial policies. 
They do this, for example, whenever they seek to fix the wages of 
their members above their real market worth. Such an attempt always 
brings about unemployment. The arrangement can be made to stick, 
in fact, only by some form of intimidation or coercion. 

Do Unions Really Raise Wages? 123 

One device consists in restricting the membership of the union on 
some other basis than that of proved competence or skill. This restric- 
tion may take many forms: it may consist in charging new workers 
excessive initiation fees; in arbitrary membership qualifications; in dis- 
crimination, open or concealed, on grounds of religion, race, or sex; 
in some absolute limitation on the number of members; or in exclu- 
sion, by force if necessary, not only of the products of nonunion 
labor, but of the products even of affiliated unions in other States or 

The most obvious case in which intimidation and force are used to 
put or keep the wages of a particular union above the real market 
worth of its members’ services is that of a strike. A peaceful strike is 
possible. To the extent that it remains peaceful, it is a legitimate labor 
weapon, even though it is one that should be used rarely and as a last 
resort. If his workers as a body withhold their labor, they may bring a 
stubborn employer, who has been underpaying them, to his senses. He 
may find that he is unable to replace these workers by workers equally 
good who are willing to accept the wage that the former have now 
rejected. But the moment workers have to use intimidation or violence 
to enforce their demands — the moment they use pickets to prevent 
any of the old workers from continuing at their jobs, or to prevent the 
employer from hiring new permanent workers to take their places — 
their case becomes questionable. For the pickets are really being used, 
not primarily against the employer, but against other workers. These 
other workers are willing to take the jobs that the old employees have 
vacated, and at the wages that the old employees now reject. The fact 
proves that the other alternatives open to the new workers are not as 
good as those that the old employees have refused. If, therefore, the 
old employees succeed by force in preventing new workers from tak- 
ing their place, they prevent these new workers from choosing the best 
alternative open to them, and force them to take something worse. The 
strikers are therefore insisting on a position of privilege, and are using 
force to maintain this privileged position against other workers. 

If the foregoing analysis is correct, the indiscriminate hatred of the 
“strikebreaker” is not justified. If the strikebreakers consist merely of 

124 Economics in One Lesson 

professional thugs who themselves threaten violence, or who cannot in 
fact do the work, or if they are being paid a temporarily higher rate 
solely for the purpose of making a pretense of carrying on until the 
old workers are frightened back to work at the old rates, the hatred may 
be warranted. But if they are in fact merely men and women who are 
looking for permanent jobs and willing to accept them at the old rate, 
then they are workers who would be shoved into worse jobs than these 
in order to enable the striking workers to enjoy better ones. And this 
superior position for the old employees could continue to be main- 
tained, in fact, only by the ever-present threat of force. 


Emotional economics has given birth to theories that calm examina- 
tion cannot justify. One of these is the idea that labor is being “under- 
paid” generally. This would be analogous to the notion that in a free mar- 
ket prices in general are chronically too low. Another curious but 
persistent notion is that the interests of a nation’s workers are identical 
with each other, and that an increase in wages for one union in some 
obscure way helps all other workers. Not only is there no truth in this 
idea; the truth is that, if a particular union by coercion is able to enforce 
for its own members a wage substantially above the real market worth 
of their services, it will hurt all other workers as it hurts other members 
of the community. 

In order to see more clearly how this occurs, let us imagine a com- 
munity in which the facts are enormously simplified arithmetically. 
Suppose the community consisted of just half a dozen groups of 
workers, and that these groups were originally equal to each other in 
their total wages and the market value of their product. 

Let us say that these six groups of workers consist of (1) farm 
hands, (2) retail store workers, (3) workers in the clothing trades, (4) 
coal miners, (5) building workers, and (6) railway employees. Their 
wage rates, determined without any element of coercion, are not nec- 
essarily equal; but whatever they are, let us assign to each of them an 
original index number of 100 as a base. Now let us suppose that each 
group forms a national union and is able to enforce its demands in 

Do Unions Really Raise Wages? 125 

proportion not merely to its economic productivity but to its political 
power and strategic position. Suppose the result is that the farm hands 
are unable to raise their wages at all, that the retail store workers are 
able to get an increase of 10 percent, the clothing workers of 20 per- 
cent, the coal miners of 30 percent, the building trades of 40 percent, 
and the railroad employees of 50 percent. 

On the assumptions we have made, this will mean that there has 
been an average increase in wages of 25 percent. Now suppose, again 
for the sake of arithmetical simplicity, that the price of the product 
that each group of workers makes rises by the same percentage as the 
increase in that group’s wages. (For several reasons, including the fact 
that labor costs do not represent all costs, the price will not quite do 
that — certainly not in any short period. But the figures will none the 
less serve to illustrate the basic principle involved.) 

We shall then have a situation in which the cost of living has risen 
by an average of 25 percent. The farm hands, though they have had 
no reduction in their money wages, will be considerably worse off in 
terms of what they can buy. The retail store workers, even though 
they have got an increase in money wages of 1 0 percent, will be worse 
off than before the race began. Even the workers in the clothing 
trades, with a money-wage increase of 20 percent, will be at a disad- 
vantage compared with their previous position. The coal miners, with 
a money-wage increase of 30 percent, will have made in purchasing 
power only a slight gain. The building and railroad workers will of 
course have made a gain, but one much smaller in actuality than in 

But even such calculations rest on the assumption that the forced 
increase in wages has brought about no unemployment. This is likely to 
be true only if the increase in wages has been accompanied by an equiv- 
alent increase in money and bank credit; and even then it is improbable 
that such distortions in wage rates can be brought about without creat- 
ing pockets of unemployment, particularly in the trades in which wages 
have advanced the most. If this corresponding monetary inflation does 
not occur, the forced wage advances will bring about widespread unem- 

126 Economics in One Lesson 

The unemployment need not necessarily be greatest, in percentage 
terms, among the unions whose wages have been advanced the most; 
for unemployment will be shifted and distributed in relation to the rel- 
ative elasticity of the demand for different kinds of labor and in rela- 
tion to the “joint” nature of the demand for many kinds of labor. Yet 
when all these allowances have been made, even the groups whose 
wages have been advanced the most will probably be found, when 
their unemployed are averaged with their employed members, to be 
worse off than before. And in terms of welfare, of course, the loss suf- 
fered will be much greater than the loss in merely arithmetical terms, 
because the psychological losses of those who are unemployed will 
gready outweigh the psychological gains of those with a slighdy 
higher income in terms of purchasing power. 

Nor can the situation be rectified by providing unemployment relief. 
Such relief, in the first place, is paid for in large part, directly or indirectly, 
out of the wages of those who work. It therefore reduces these wages. 
“Adequate” relief payments, moreover, as we have already seen, create 
unemployment. They do so in several ways. When strong labor unions 
in the past made it their function to provide for their own unemployed 
members, they thought twice before demanding a wage that would cause 
heavy unemployment. But where there is a relief system under which the 
general taxpayer is forced to provide for the unemployment caused by 
excessive wage rates, this restraint on excessive union demands is 
removed. Moreover, as we have already noted, “adequate” relief will 
cause some men not to seek work at all, and will cause others to consider 
that they are in effect being asked to work not for the wage offered, but 
only for the difference between that wage and the relief payment. And 
heavy unemployment means that fewer goods are produced, that the 
nation is poorer, and that there is less for everybody. 

The aposdes of salvation by unionism sometimes attempt another 
answer to the problem I have just presented. It may be true, they will 
admit, that the members of strong unions today exploit, among others, 
the nonunionized workers; but the remedy is simple: unionize every- 
body. The remedy, however, is not quite that simple. In the first place, 
in spite of the enormous, political encouragements (one might in some 

Do Unions Really Raise Wages ? 127 

cases say compulsions) to unionization under the Wagner Act and other 
laws, it is not an accident that only about a fourth of this nation’s gain- 
fully employed workers are unionized. The conditions propitious to 
unionization are much more special than generally recognized. But even 
if universal unionization could be achieved, the unions could not pos- 
sibly be equally powerful, any more than they are today. Some groups of 
workers are in a far better strategic position than others, either because 
of greater numbers, of the more essential nature of the product they 
make, of the greater dependence on their industry of other industries, 
or of their greater ability to use coercive methods. But suppose this 
were not so? Suppose, in spite of the self-contradictoriness of the 
assumption, that all workers by coercive methods could raise their 
wages by an equal percentage? Nobody would be any better off, in the 
long run, than if wages had not been raised at all. 


This leads us to the heart of the question. It is usually assumed 
that an increase in wages is gained at the expense of the profits of 
employers. This may of course happen for short periods or in special 
circumstances. If wages are forced up in a particular firm, in such 
competition with others that it cannot raise its prices, the increase will 
come out of its profits. This is much less likely to happen, however, if 
the wage increase takes place throughout a whole industry. The indus- 
try will in most cases increase its prices and pass the wage increase 
along to consumers. As these are likely to consist for the most part of 
workers, they will simply have their real wages reduced by having to 
pay more for a particular product. It is true that as a result of the 
increased prices, sales of that industry’s products may fall off, so that 
volume of profits in the industry will be reduced; but employment 
and total payrolls in the industry are likely to be reduced by a corre- 
sponding amount. 

It is possible, no doubt, to conceive of a case in which the profits 
in a whole industry are reduced without any corresponding reduction 
in employment — a case, in other words, in which an increase in wage 
rates means a corresponding increase in payrolls, and in which the 

128 Economics in One Lesson 

whole cost comes out of the industry’s profits without throwing any 
firm out of business. Such a result is not likely, but it is conceivable. 

Suppose we take an industry like that of the railroads, for example, 
which cannot always pass increased wages along to the public in the 
form of higher rates, because government regulation will not permit 
it. (Actually the great rise of railway wage rates has been accompanied 
by the most drastic consequences to railway employment. The num- 
ber of workers on the Class I American railroads reached its peak in 
1920 at 1,685,000, with their average wages at 66 cents an hour; it had 
fallen to 959,000 in 1931, with their average wages at 67 cents an hour; 
and it had fallen further to 699,000 in 1938 with average wages at 74 
cents an hour. But we can for the sake of argument overlook actuali- 
ties for the moment and talk as if we were discussing a hypothetical 

It is at least possible for unions to make their gains in the short run 
at the expense of employers and investors. The investors once had liq- 
uid funds. But they have put them, say, into the railroad business. They 
have turned them into rails and roadbeds, freight cars, and locomo- 
tives. Once their capital might have been turned into any of a thou- 
sand forms, but today it is trapped, so to speak, in one particular form. 
The railway unions may force them to accept smaller returns on this 
capital already invested. It will pay the investors to continue running 
the railroad if they can earn anything at all above operating expenses, 
even if it is only one-tenth of 1 percent on their investment. 

But there is an inevitable corollary of this. If the money that they 
have invested in railroads now yields less than money they can invest 
in other lines, the investors will not put a cent more into railroads. 
They may replace a few of the things that wear out first, to protect the 
small yield on their remaining capital; but in the long run they will not 
even bother to replace items that fall into obsolescence or decay. If 
capital invested at home pays them less than that invested abroad, they 
will invest abroad. If they cannot find sufficient return anywhere to 
compensate them for their risk, they will cease to invest at all. 

Thus the exploitation of capital by labor can at best be merely tem- 
porary. It will quickly come to an end. It will come to an end, actually, 

Do Unions Really Raise if ''ages? 129 

not so much in the way indicated in our hypothetical illustration, as by 
the forcing of marginal firms out of business entirely, the growth of 
unemployment, and the forced readjustment of wages and profits to the 
point where the prospect of normal (or abnormal) profits leads to a 
resumption of employment and production. But in the meanwhile, as a 
result of the exploitation, unemployment and reduced production will 
have made everybody poorer. Even though labor for a time will have a 
greater relative share of the national income, the national income will fall 
absolutely; so that labor’s relative gains in these short periods may mean 
a Pyrrhic victory: they may mean that labor, too, is getting a lower total 
amount in terms of real purchasing power. 

Thus we are driven to the conclusion that unions, though they may 
for a time be able to secure an increase in money wages for their mem- 
bers, partly at the expense of employers and more at the expense of 
nonunionized workers, do not, in the long run and for the whole body of workers, 
increase real wages at all 


The belief that they do so rests on a series of delusions. One of 
these is the fallacy of post hoc ergo propter hoc, which sees the enormous 
rise in wages in the last half century, due principally to the growth of 
capital investment and to scientific and technological advance, and 
ascribes it to the unions because the unions were also growing during 
this period. But the error most responsible for the delusion is that of 
considering merely what a rise of wages brought about by union 
demands means in the short run for the particular workers who retain 
their jobs, while failing to trace the effects of this advance on employ- 
ment, production and the living costs of all workers, including those 
who forced the increase. 

One may go further than this conclusion, and raise the question 
whether unions have not, in the long run and for the whole body of 
workers, actually prevented real wages from rising to the extent to 
which they otherwise might have risen. They have certainly been a 
force working to hold down or to reduce wages if their effect, on net 

1 30 Economics in One Lesson 

balance, has been to reduce labor productivity; and we may ask 
whether it has not been so. 

With regard to productivity there is something to be said for 
union policies, it is true, on the credit side. In some trades they have 
insisted on standards to increase the level of skill and competence. 
And in their early history they did much to protect the health of their 
members. Where labor was plentiful, individual employers often 
stood to gain by speeding up workers and working them long hours 
in spite of ultimate ill effects upon their health, because they could 
easily be replaced with others. And sometimes ignorant or short- 
sighted employers would even reduce their own profits by overwork- 
ing their employees. In all these cases the unions, by demanding 
decent standards, often increased the health and broader welfare of 
their members at the same time as they increased their real wages. 

But in recent years, as their power has grown, and as much misdi- 
rected public sympathy has led to a tolerance or endorsement of anti- 
social practices, unions have gone beyond their legitimate goals. It was 
a gain, not only to health and welfare, but even in the long run to pro- 
duction, to reduce a seventy-hour week to a sixty-hour week. It was a 
gain to health and leisure to reduce a sixty-hour week to a forty-eight- 
hour week. It was a gain to leisure, but not necessarily to production 
and income, to reduce a forty-eight-hour week to a forty-four-hour 
week. The value to health and leisure of reducing the working week 
to forty hours is much less, the reduction in output and income more 
clear. But the unions now talk, and often enforce, thirty-five- and 
thirty-hour weeks, and deny that these can or should reduce output or 

But it is not only in reducing scheduled working hours that union 
policy has worked against productivity. That, in fact, is one of the least 
harmful ways in which it has done so; for the compensating gain, at 
least, has been clear. But many unions have insisted on rigid subdivi- 
sions of labor which have raised production costs and led to expensive 
and ridiculous “jurisdictional” disputes. They have opposed payment 
on the basis of output or efficiency, and insisted on the same hourly 
rates for all their members regardless of differences in productivity. 

Do Unions Really Raise Wages? 131 

They have insisted on promotion for seniority rather than for merit. 
They have initiated deliberate slowdowns under the pretense of fight- 
ing “speedups.” They have denounced, insisted upon the dismissal of, 
and sometimes cruelly beaten, men who turned out more work than 
their fellows. They have opposed the introduction or improvement of 
machinery. They have insisted on make-work rules to require more 
people or more time to perform a given task. They have even insisted, 
with the threat of ruining employers, on the hiring of people who are 
not needed at all. 

Most of these policies have been followed under the assumption 
that there is just a fixed amount of work to be done, a definite “job 
fund” which has to be spread over as many people and hours as pos- 
sible so as not to use it up too soon. This assumption is utterly false. 
There is actually no limit to the amount of work to be done. Work cre- 
ates work. What A produces constitutes the demand for what B pro- 

But because this false assumption exists, and because the policies 
of unions are based on it, their net effect has been to reduce produc- 
tivity below what it would otherwise have been. Their net effect, 
therefore, in the long run and for all groups of workers, has been to 
reduce real wages — that is, wages in terms of the goods they will buy — 
below the level to which they would otherwise have risen. The real 
cause for the tremendous increase in real wages in the last half cen- 
tury (especially in America) has been, to repeat, the accumulation of 
capital and the enormous technological advance made possible by it. 

Reduction of the rate of increase in real wages is not, of course, a 
consequence inherent in the nature of unions. It has been the result 
of shortsighted policies. There is still time to change them. 

Chapter 20 

“Enough to Buy Back the Product” 


A mateur writers on economics are always asking for “just” prices 
and “just” wages. These nebulous conceptions of economic jus- 
tice come down to us from medieval times. The classical economists 
worked out, instead, a different concept — the concept of functional 
prices and functional wages. Functional prices are those that encourage 
the largest volume of production and the largest volume of sales. 
Functional wages are those that tend to bring about the highest vol- 
ume of employment and the largest payrolls. 

The concept of functional wages has been taken over, in a per- 
verted form, by the Marxists and their unconscious disciples, the pur- 
chasing-power school. Both of these groups leave to cruder minds the 
question whether existing wages are “fair.” The real question, they 
insist, is whether or not they will work. And the only wages that will 
work, they tell us, the only wages that will prevent an imminent eco- 
nomic crash, are wages that will enable labor “to buy back the prod- 
uct it creates.” The Marxist and purchasing-power schools attribute 
every depression of the past to a preceding failure to pay such wages. 
And at no matter what moment they speak, they are sure that wages 
are still not high enough to buy back the product. 


1 34 Economics in One Lesson 

The doctrine has proved particularly effective in the hands of union 
leaders. Despairing of their ability to arouse the altruistic interest of the 
public or to persuade employers (wicked by definition) ever to be “fair,” 
they have seked upon an argument calculated to appeal to the public’s 
selfish motives, and frighten it into forcing employers to grant their 

How are we to know, however, precisely when labor does have 
“enough to buy back the product”? Or when it has more than 
enough? How are we to determine just what the right sum is? As the 
champions of the doctrine do not seem to have made any clear effort 
to answer such questions, we are obliged to try to find the answers for 

Some sponsors of the theory seem to imply that the workers in 
each industry should receive enough to buy back the particular prod- 
uct they make. But they surely cannot mean that the makers of cheap 
dresses should have enough to buy back cheap dresses and the mak- 
ers of mink coats enough to buy back mink coats; or that the men in 
the Ford plant should receive enough to buy Fords and the men in the 
Cadillac plant enough to buy Cadillacs. 

It is instructive to recall, however, that the unions in the automo- 
bile industry, at a time when most of their members were already in 
the upper third of the country’s income receivers, and when their 
weekly wage, according to government figures, was already 20 percent 
higher than the average wage paid in factories and nearly twice as great 
as the average paid in retail trade, were demanding a 30 percent 
increase so that they might, according to one of their spokesmen, 
“bolster our fast-shrinking ability to absorb the goods which we have 
the capacity to produce.” 

What, then, of the average factory worker and the average retail 
worker? If, under such circumstances, the automobile workers needed a 
30 percent increase to keep the economy from collapsing, would a mere 
30 percent have been enough for the others? Or would they have 
required increases of 55 to 160 percent to give them as much per capita 
purchasing power as the automobile workers? (We may be sure, if the 
history of wage bargaining even within individual unions is any guide, that 

“Enough to Huy Hack the Product” 135 

the automobile workers, if this last proposal had been made, would 
have insisted on the maintenance of their existing differentials; for the 
passion for economic equality, among union members as among the 
rest of us, is, with the exception of a few rare philanthropists and 
saints, a passion for getting as much as those above us in the economic 
scale already get rather than a passion for giving those below us as 
much as we ourselves already get. But it is with the logic and sound- 
ness of a particular economic theory, rather than with these distressing 
weaknesses of human nature, that we are at present concerned.) 


The argument that labor should receive enough to buy back the 
product is merely a special form of the general “purchasing power” 
argument. The workers’ wages, it is correctly enough contended, are 
the workers’ purchasing power. But it is just as true that everyone’s 
income — the grocer’s, the landlord’s, the employer’s — is his purchas- 
ing power for buying what others have to sell. And one of the most 
important things for which others have to find purchasers is their 
labor services. 

All this, moreover, has its reverse side. In an exchange economy every- 
body’s income is somebody else’s cost. Every increase in hourly wages, unless 
or until compensated by an equal increase in hourly productivity, is an 
increase in costs of production. An increase in costs of production, 
where the government controls prices and forbids any price increase, 
takes the profit from marginal producers, forces them out of business, 
means a shrinkage in production and a growth in unemployment. 
Even where a price increase is possible, the higher price discourages 
buyers, shrinks the market, and also leads to unemployment. If a 30 
percent increase in hourly wages all around the circle forces a 30 per- 
cent increase in prices, labor can buy no more of the product than it 
could at the beginning; and the merry-go-round must start all over 

No doubt many will be inclined to dispute the contention that a 
30 percent increase in wages can force as great a percentage increase in 
prices. It is true that this result can follow only in the long run and only 

136 Economics in One Lesson 

if monetary and credit policy permit it. If money and credit are so 
inelastic that they do not increase when wages are forced up (and if 
we assume that the higher wages are not justified by existing labor 
productivity in dollar terms), then the chief effect of forcing up wage 
rates will be to force unemployment. 

And it is probable, in that case, that total payrolls, both in dollar 
amount and in real purchasing power, will be lower than before. For a 
drop in employment (brought about by union policy and not as a tran- 
sitional result of technological advance) necessarily means that fewer 
goods are being produced for everyone. And it is unlikely that labor 
will compensate for the absolute drop in production by getting a 
larger relative share of the production that is left. For Paul H. Dou- 
glas in America and A.C. Pigou in England, the first from analyzing a 
great mass of statistics, the second by almost purely deductive meth- 
ods, arrived independently at the conclusion that the elasticity of the 
demand for labor is somewhere between —3 and —4. This means, in 
less technical language, that “a 1 percent reduction in the real rate of 
wage is likely to expand the aggregate demand for labor by not less 
than 3 percent.” 1 Or, to put the matter the other way, “If wages are 
pushed up above the point of marginal productivity, the decrease in 
employment would normally be from three to four times as great as 
the increase in hourly rates” 2 so that the total income of the workers 
would be reduced correspondingly. 

Even if these figures are taken to represent only the elasticity of 
the demand for labor revealed in a given period of the past, and not 
necessarily to forecast that of the future, they deserve the most seri- 
ous consideration. 


But now let us suppose that the increase in wage rates is accompa- 
nied or followed by a sufficient increase in money and credit to allow 
it to take place without creating serious unemployment. If we assume 

A.C. Pigou, The Theory of Unemployment (London: Macmillan, 1933), p. 96. 
2 Paul H. Douglas, The Theory of Wages (New York: Macmillan, 1934), p. 501. 

“Enough to Huy Hack the Product” 137 

that the previous relationship between wages and prices was itself a 
“normal” long-run relationship, then it is altogether probable that a 
forced increase of, say, 30 percent in wage rates will ultimately lead to 
an increase in prices of approximately the same percentage. 

The belief that the price increase would be substantially less than 
that rests on two main fallacies. The first is that of looking only at the 
direct labor costs of a particular firm or industry and assuming these 
to represent all the labor costs involved. But this is the elementary 
error of mistaking a part for the whole. Each “industry” represents 
not only just one section of the productive process considered “hor- 
izontally,” but just one section of that process considered “vertically.” 
Thus the direct labor cost of making automobiles in the automobile 
factories themselves may be less than a third, say, of the total costs; 
and this may lead the incautious to conclude that a 30 percent increase 
in wages would lead to only a 10 percent increase, or less, in automo- 
bile prices. But this would be to overlook the indirect wage costs in 
the raw materials and purchased parts, in transportation charges, in 
new factories or new machine tools, or in the dealers’ markup. 

Government estimates show that in the fifteen-year period from 
1929 to 1943, inclusive, wages and salaries in the United States averaged 
69 percent of the national income. These wages and salaries, of course, 
had to be paid out of the national product. While there would have to 
be both deductions from this figure and additions to it to provide a fair 
estimate of “labor’s” income, we can assume on this basis that labor 
costs cannot be less than about two-thirds of total production costs and 
may run above three-quarters (depending upon our definition of 
“labor”). If we take the lower of these two estimates, and assume also 
that dollar profit margins would be unchanged, it is clear that an 
increase of 30 percent in wage costs all around the circle would mean 
an increase of nearly 20 percent in prices. 

But such a change would mean that the dollar profit margin, rep- 
resenting the income of investors, managers, and the self-employed, 
would then have, say, only 84 percent as much purchasing power as it 
had before. The long-run effect of this would be to cause a diminu- 
tion of investment and new enterprise compared with what it would 

138 Economics in One Lesson 

otherwise have been, and consequent transfers of men from the lower 
ranks of the self-employed to the higher ranks of wage earners, until 
the previous relationships had been approximately restored. But this 
is only another way of saying that a 30 percent increase in wages under 
the conditions assumed would eventually mean also a 30 percent 
increase in prices. 

It does not necessarily follow that wage earners would make no rel- 
ative gains. They would make a relative gain and other elements in the 
population would suffer a relative loss, during the period of transition. But 
it is improbable that this relative gain would mean an absolute gain. 
For the kind of change in the relationship of costs to prices contem- 
plated here could hardly take place without bringing about unemploy- 
ment and unbalanced, interrupted, or reduced production. So that 
while labor might get a broader slice of a smaller pie, during this 
period of transition and adjustment to a new equilibrium, it may be 
doubted whether this would be greater in absolute size (and it might 
easily be less) than the previous narrower slice of a larger pie. 


This brings us to the general meaning and effect of economic equi- 
librium. Equilibrium wages and prices are the wages and prices that 
equalize supply and demand. If, either through government or private 
coercion, an attempt is made to lift prices above their equilibrium 
level, demand is reduced and therefore production is reduced. If an 
attempt is made to push prices below their equilibrium level, the con- 
sequent reduction or wiping out of profits will mean a falling off of 
supply or new production. Therefore an attempt to force prices either 
above or below their equilibrium levels (which are the levels toward 
which a free market constantly tends to bring them) will act to reduce 
the volume of employment and production below what it would oth- 
erwise have been. 

To return, then, to the doctrine that labor must get “enough to buy 
back the product.” The national product, it should be obvious, is nei- 
ther created nor bought by manufacturing labor alone. It is bought by 
everyone — by white collar workers, professional men, farmers, 

“Enough to Huy Hack the Product” 139 

employers, big and little, by investors, grocers, butchers, owners of 
small drug stores, and gasoline stations — by everybody, in short, who 
contributes toward making the product. 

As to the prices, wages, and profits that should determine the dis- 
tribution of that product, the best prices are not the highest prices, 
but the prices that encourage the largest volume of production and 
the largest volume of sales. The best wage rates for labor are not the 
highest wage rates, but the wage rates that permit full production, full 
employment, and the largest sustained payrolls. The best profits, from 
the standpoint not only of industry but of labor, are not the lowest 
profits, but the profits that encourage most people to become 
employers or to provide more employment than before. 

If we try to run the economy for the benefit of a single group or 
class, we shall injure or destroy all groups, including the members of 
the very class for whose benefit we have been trying to run it. We 
must run the economy for everybody. 

Chapter 21 

The Function of Profits 

T he indignation shown by many people today at the mention of the 
very word “profits” indicates how little understanding there is of 
the vital function that profits play in our economy. To increase our 
understanding, we shall go over again some of the ground already cov- 
ered in chapter 14 on the price system, but we shall view the subject from 
a different angle. 

Profits actually do not bulk large in our total economy. The net 
income of incorporated business in the fifteen years from 1929 to 
1943, to take an illustrative figure, averaged less than 5 percent of the 
total national income. Yet “profits” are the form of income toward 
which there is most hostility. It is significant that while there is a word 
“profiteer” to stigmatize those who make allegedly excessive profits, 
there is no such word as “wageer” — or “losseer.” Yet the profits of 
the owner of a barber shop may average much less not merely than 
the salary of a motion picture star or the hired head of a steel corpo- 
ration, but less even than the average wage for skilled labor. 

The subject is clouded by all sorts of factual misconceptions. The 
total profits of General Motors, the greatest industrial corporation in 
the world, are taken as if they were typical rather than exceptional. Few 
people are acquainted with the mortality rates for business concerns. 
They do not know (to quote from the TNEC studies) that “should 


142 Economics in One Lesson 

conditions of business averaging the experience of the last fifty years 
prevail, about seven of each ten grocery stores opening today will sur- 
vive into their second year; only four of the ten may expect to celebrate 
their fourth birthday.” They do not know that in every year from 1 930 
to 1938, in the income tax statistics, the number of corporations that 
showed a loss exceeded the number that showed a profit. 

How much do profits, on the average, amount to? No trustworthy 
estimate has been made that takes into account all kinds of activity, 
unincorporated as well as incorporated business, and a sufficient num- 
ber of good and bad years. But some eminent economists believe that 
over a long period of years, after allowance is made for all losses, for 
a minimum “riskless” interest on invested capital, and for an imputed 
“reasonable” wage value of the services of people who run their own 
business, no net profit at all may be left over, and that there may even 
be a net loss. This is not at all because entrepreneurs (people who go 
into business for themselves) are intentional philanthropists, but 
because their optimism and self-confidence too often lead them into 
ventures that do not or cannot succeed. 1 

It is clear, in any case, that any individual placing venture capital 
runs a risk not only of earning no return but of losing his whole prin- 
cipal. In the past it has been the lure of high profits in special firms 
or industries that has led him to take that great risk. But if profits are 
limited to a maximum of, say, 1 0 percent or some similar figure, while 
the risk of losing one’s entire capital still exists, what is likely to be the 
effect on the profit incentive, and hence on employment and produc- 
tion? The wartime excess-profits tax has already shown us what such 
a limit can do, even for a short period, in undermining efficiency. 

Yet governmental policy almost everywhere today tends to assume 
that production will go on automatically, no matter what is done to 
discourage it. One of the greatest dangers to production today comes 
from government price-fixing policies. Not only do these policies put 
one item after another out of production by leaving no incentive to 

Cf. Frank H. Knight, Risk, Uncertainty and Profit (Boston: Riverside Press, 1921). 

The ¥ unction of Profits 143 

make it, but their long-run effect is to prevent a balance of produc- 
tion in accordance with the actual demands of consumers. If the 
economy were free, demand would act so that some branches of pro- 
duction would make what government officials would undoubtedly 
regard as “excessive” or “unreasonable” profits. But that very fact 
would not only cause every firm in that line to expand its production 
to the utmost, and to reinvest its profits in more machinery and more 
employment; it would also attract new investors and producers from 
everywhere, until production in that line was great enough to meet 
demand, and the profits in it again fell to the general average level. 

In a free economy, in which wages, costs, and prices are left to the 
free play of the competitive market, the prospect of profits decides 
what articles will be made, and in what quantities — and what articles 
will not be made at all. If there is no profit in making an article, it is 
a sign that the labor and capital devoted to its production are misdi- 
rected: the value of the resources that must be used up in making the 
article is greater than the value of the article itself. 

One function of profits, in brief, is to guide and channel the fac- 
tors of production so as to apportion the relative output of thousands 
of different commodities in accordance with demand. No bureaucrat, 
no matter how brilliant, can solve this problem arbitrarily. Free prices 
and free profits will maximize production and relieve shortages 
quicker than any other system. Arbitrarily-fixed prices and arbitrarily- 
limited profits can only prolong shortages and reduce production and 

The function of profits, finally, is to put constant and unremitting 
pressure on the head of every competitive business to introduce fur- 
ther economies and efficiencies, no matter to what stage these may 
already have been brought. In good times he does this to increase his 
profits further; in normal times he does it to keep ahead of his com- 
petitors; in bad times he may have to do it to survive at all. For prof- 
its may not only go to zero; they may quickly turn into losses; and a 
man will put forth greater efforts to save himself from ruin than he 
will merely to improve his position. 

144 Economics in One Lesson 

Profits, in short, resulting from the relationships of costs to prices, 
not only tell us which goods it is most economical to make, but which 
are the most economical ways to make them. These questions must be 
answered by a socialist system no less than by a capitalist one; they 
must be answered by any conceivable economic system; and for the 
overwhelming bulk of the commodities and services that are pro- 
duced, the answers supplied by profit and loss under competitive free 
enterprise are incomparably superior to those that could be obtained 
by any other method. 

Chapter 22 

The Mirage of Inflation 


I have found it necessary to warn the reader from time to time that 
a certain result would necessarily follow from a certain policy “pro- 
vided there is no inflation.” In the chapters on public works and on 
credit I said that a study of the complications introduced by inflation 
would have to be deferred. But money and monetary policy form so 
intimate and sometimes so inextricable a part of every economic 
process that this separation, even for expository purposes, was very 
difficult; and in the chapters on the effect of various government or 
union wage policies on employment, profits, and production, some of 
the effects of differing monetary policies had to be considered imme- 

Before we consider what the consequences of inflation are in specific 
cases, we should consider what its consequences are in general. Even 
prior to that, it seems desirable to ask why inflation has been constantly 
resorted to, why it has had an immemorial popular appeal, and why its 
siren music has tempted one nation after another down the path to eco- 
nomic disaster. 

The most obvious and yet the oldest and most stubborn error on 
which the appeal of inflation rests is that of confusing “money” with 


146 Economics in One Lesson 

wealth. “That wealth consists in money, or in gold and silver,” wrote 
Adam Smith nearly two centuries ago, 

is a popular notion which naturally arises from the dou- 
ble function of money, as the instrument of commerce, 
and as the measure of value. ... To grow rich is to get 
money; and wealth and money, in short, are, in common 
language, considered as in every respect synonymous. 

Real wealth, of course, consists in what is produced and con- 
sumed: the food we eat, the clothes we wear, the houses we live in. 
It is railways and roads and motor cars; ships and planes and facto- 
ries; schools and churches and theaters; pianos, paintings, and 
books. Yet so powerful is the verbal ambiguity that confuses money 
with wealth, that even those who at times recognize the confusion 
will slide back into it in the course of their reasoning. Each man 
sees that if he personally had more money he could buy more 
things from others. If he had twice as much money he could buy 
twice as many things; if he had three times as much money he 
would be “worth” three times as much. And to many the conclu- 
sion seems obvious that if the government merely issued more 
money and distributed it to everybody, we should all be that much 

These are the most naive inflationists. There is a second group, 
less naive, who see that if the whole thing were as easy as that the 
government could solve all our problems merely by printing money. 
They sense that there must be a catch somewhere; so they would 
limit in some way the amount of additional money they would have 
the government issue. They would have it print just enough to make 
up some alleged “deficiency” or “gap.” 

Purchasing power is chronically deficient, they think, because 
industry somehow does not distribute enough money to producers to 
enable them to buy back, as consumers, the product that is made. 
There is a mysterious “leak” somewhere. One group “proves” it by 
equations. On one side of their equations they count an item only 

The Mirage of Inflation 147 

once; on the other side they unknowingly count the same item several 
times over. This produces an alarming gap between what they call “A 
payments” and what they call “A+B payments.” So they found a 
movement, put on green uniforms, and insist that the government 
issue money or “credits” to make good the missing B payments. 

The cruder aposdes of “social credit” may seem ridiculous; but 
there are an indefinite number of schools of only slighdy more 
sophisticated inflationists who have “scientific” plans to issue just 
enough additional money or credit to fill some alleged chronic or peri- 
odic “deficiency” or “gap” which they calculate in some other way. 


The more knowing inflationists recognize that any substantial 
increase in the quantity of money will reduce the purchasing power 
of each individual monetary unit — in other words, that it will lead to 
an increase in commodity prices. But this does not disturb them. On 
the contrary, it is precisely why they want the inflation. Some of them 
argue that this result will improve the position of poor debtors as 
compared with rich creditors. Others think it will stimulate exports 
and discourage imports. Still others think it is an essential measure to 
cure a depression, to “start industry going again,” and to achieve “full 

There are innumerable theories concerning the way in which 
increased quantities of money (including bank credit) affect prices. 
On the one hand, as we have just seen, are those who imagine that 
the quantity of money could be increased by almost any amount 
without affecting prices. They merely see this increased money as a 
means of increasing everyone’s “purchasing power,” in the sense of 
enabling everybody to buy more goods than before. Either they 
never stop to remind themselves that people collectively cannot buy 
twice as much goods as before unless twice as much goods are pro- 
duced, or they imagine that the only thing that holds down an indef- 
inite increase in production is not a shortage of manpower, working 
hours or productive capacity, but merely a shortage of monetary 

148 Economics in One Lesson 

demand: if people want the goods, they assume, and have the money 
to pay for them, the goods will almost automatically be produced. 

On the other hand is the group — and it has included some eminent 
economists — that holds a rigid mechanical theory of the effect of the 
supply of money on commodity prices. All the money in a nation, as 
these theorists picture the matter, will be offered against all the goods. 
Therefore the value of the total quantity of money multiplied by its 
“velocity of circulation” must always be equal to the value of the total 
quantity of goods bought. Therefore, further (assuming no change in 
“velocity of circulation”), the value of the monetary unit must vary 
exactly and inversely with the amount put into circulation. Double the 
quantity of money and bank credit and you exactly double the “price 
level;” triple it and you exactly triple the price level. Multiply the quan- 
tity of money n times, in short, and you must multiply the prices of 
goods n times. 

There is not space here to explain all the fallacies in this plausible 
picture. 1 Instead we shall try to see just why and how an increase in 
the quantity of money raises prices. 

An increased quantity of money comes into existence in a specific 
way. Let us say that it comes into existence because the government 
makes larger expenditures than it can or wishes to meet out of the 
proceeds of taxes (or from the sale of bonds paid for by the people 
out of real savings). Suppose, for example, that the government prints 
money to pay war contractors. Then the first effect of these expendi- 
tures will be to raise the prices of supplies used in war and to put addi- 
tional money into the hands of the war contractors and their employ- 
ees. (As, in our chapter on price-fixing, we deferred for the sake of 
simplicity some complications introduced by an inflation, so, in now 
considering inflation, we may pass over the complications introduced 
by an attempt at government price-fixing. When these are considered 
it will be found that they do not change the essential analysis. They 

Tlie reader interested in an analysis of them should consult Benjamin M. Anderson, The 
Value of Money (New York: Macmillan, 1917; New York: Richard R. Smith, 1936); or Lud- 
wig von Mises, The Theory of Money and Credit (New Haven, Conn.: Yale University Press, 

The Mirage of Inflation 149 

lead merely to a sort of backed-up inflation that reduces or conceals 
some of the earlier consequences at the expense of aggravating the 
later ones.) 

The war contractors and their employees, then, will have higher 
money incomes. They will spend them for the particular goods and 
services they want. The sellers of these goods and services will be able 
to raise their prices because of this increased demand. Those who 
have the increased money income will be willing to pay these higher 
prices rather than do without the goods; for they will have more 
money, and a dollar will have a smaller subjective value in the eyes of 
each of them. 

Let us call the war contractors and their employees group A, and 
those from whom they directly buy their added goods and services 
group B. Group B, as a result of higher sales and prices, will now in 
turn buy more goods and services from a still further group, C. Group 
C in turn will be able to raise its prices and will have more income to 
spend on group D, and so on, until the rise in prices and money 
incomes has covered virtually the whole nation. When the process has 
been completed, nearly everybody will have a higher income measured 
in terms of money. But (assuming that production of goods and serv- 
ices has not increased) prices of goods and services will have increased 
correspondingly; and the nation will be no richer than before. 

This does not mean, however, that everyone’s relative or absolute 
wealth and income will remain the same as before. On the contrary, 
the process of inflation is certain to affect the fortunes of one group 
differently from those of another. The first groups to receive the addi- 
tional money will benefit most. The money incomes of group A, for 
example, will have increased before prices have increased, so that they 
will be able to buy almost a proportionate increase in goods. The 
money incomes of group B will advance later, when prices have 
already increased somewhat; but group B will also be better off in 
terms of goods. Meanwhile, however, the groups that have still had no 
advance whatever in their money incomes will find themselves com- 
pelled to pay higher prices for the things they buy, which means that 

150 Economics in One Lesson 

they will be obliged to get along on a lower standard of living than 

We may clarify the process further by a hypothetical set of figures. 
Suppose we divide the community arbitrarily into four main groups of 
producers, A, B, C, and D, who get the money-income benefit of the 
inflation in that order. Then when money incomes of group A have 
already increased 30 percent, the prices of the things they purchase 
have not yet increased at all. By the time money incomes of group B 
have increased 20 percent, prices have still increased an average of 
only 10 percent. When money incomes of group C have increased 
only 10 percent, however, prices have already gone up 15 percent. 
And when money incomes of group D have not yet increased at all, 
the average prices they have to pay for the things they buy have gone 
up 20 percent. In other words, the gains of the first groups of pro- 
ducers to benefit by higher prices or wages from the inflation are nec- 
essarily at the expense of the losses suffered (as consumers) by the last 
groups of producers that are able to raise their prices or wages. 

It may be that, if the inflation is brought to a halt after a few years, 
the final result will be, say, an average increase of 25 percent in money 
incomes, and an average increase in prices of an equal amount, both of 
which are fairly distributed among all groups. But this will not cancel 
out the gains and losses of the transition period. Group D, for exam- 
ple, even though its own incomes and prices have at last advanced 25 
percent, will be able to buy only as much goods and services as before 
the inflation started. It will never compensate for its losses during the 
period when its income and prices had not risen at all, though it had to 
pay 30 percent more for the goods and services it bought from the 
other producing groups in the community, A, B, and C. 


So inflation turns out to be merely one more example of our cen- 
tral lesson. It may indeed bring benefits for a short time to favored 
groups, but only at the expense of others. And in the long run it 
brings disastrous consequences to the whole community. Even a rela- 
tively mild inflation distorts the structure of production. It leads to 

The Mirage of Inflation 151 

the overexpansion of some industries at the expense of others. This 
involves a misapplication and waste of capital. When the inflation col- 
lapses, or is brought to a halt, the misdirected capital investment — 
whether in the form of machines, factories, or office buildings — can- 
not yield an adequate return and loses the greater part of its value. 

Nor is it possible to bring inflation to a smooth and gentle stop, 
and so avert a subsequent depression. It is not even possible to halt 
an inflation, once embarked upon, at some preconceived point, or 
when prices have achieved a previously-agreed-upon level; for both 
political and economic forces will have got out of hand. You cannot 
make an argument for a 25 percent advance in prices by inflation with- 
out someone’s contending that the argument is twice as good for an 
advance of 50 percent, and someone else’s adding that it is four times 
as good for an advance of 1 00 percent. The political pressure groups 
that have benefited from the inflation will insist upon its continuance. 

It is impossible, moreover, to control the value of money under 
inflation. For, as we have seen, the causation is never a merely mechan- 
ical one. You cannot, for example, say in advance that a 100 percent 
increase in the quantity of money will mean a 50 percent fall in the value 
of the monetary unit. The value of money, as we have seen, depends 
upon the subjective valuations of the people who hold it. And those 
valuations do not depend solely on the quantity of it that each person 
holds. They depend also on the quality of the money. In wartime the 
value of a nation’s monetary unit, not on the gold standard, will rise on 
the foreign exchanges with victory and fall with defeat, regardless of 
changes in its quantity 7 . The present valuation will often depend upon 
what people expect the future quantity of money to be. And, as with 
commodities on the speculative exchanges, each person’s valuation of 
money is affected not only by what he thinks its value is but by what he 
thinks is going to be eveiybody else’s valuation of money. 


All this explains why, when superinflation has once set in, the value 
of the monetary unit drops at a far faster rate than the quantity of 

152 Economics in One Lesson 

money either is or can be increased. When this stage is reached, the 
disaster is nearly complete; and the scheme is bankrupt. 

Yet the ardor for inflation never dies. It would almost seem as if 
no country is capable of profiting from the experience of another and 
no generation of learning from the sufferings of its forbears. Each 
generation and country follows the same mirage. Each grasps for the 
same Dead Sea fruit that turns to dust and ashes in its mouth. For it 
is the nature of inflation to give birth to a thousand illusions. 

In our own day the most persistent argument put forward for infla- 
tion is that it will “get the wheels of industry turning” that it will save 
us from the irretrievable losses of stagnation and idleness and bring 
“full employment.” This argument in its cruder form rests on the 
immemorial confusion between money and real wealth. It assumes that 
new “purchasing power” is being brought into existence, and that the 
effects of this new purchasing power multiply themselves in ever- 
widening circles, like the ripples caused by a stone thrown into a pond. 
The real purchasing power for goods, however, as we have seen, con- 
sists of other goods. It cannot be wondrously increased merely by 
printing more pieces of paper called dollars. Fundamentally what hap- 
pens in an exchange economy is that the things that A produces are 
exchanged for the things that B produces. 2 

What inflation really does is to change the relationships of prices 
and costs. The most important change it is designed to bring about is 
to raise commodity prices in relation to wage rates, and so to restore 
business profits, and encourage a resumption of output at the points 
where idle resources exist, by restoring a workable relationship 
between prices and costs of production. 

It should be immediately clear that this could be brought about 
more directly and honestly by a reduction in wage rates. But the more 

2 Cf. John Stuart Mill, Principles of Political Economy (New York: D. Appleton, 1901; book 3, 
chap. 14, par. 2); Alfred Marshall, Princples of Economics (London: Macmillan, 1938; book 
VI, chap. XIII, sec. 10), and Benjamin M. Anderson, “A Refutation of Keynes’ Attack on 
the Doctrine that Aggregate Supply Creates Aggregate Demand,” in Financing American 
Prosperity by a symposium of economists. 

The Mirage of Inflation 153 

sophisticated proponents of inflation believe that this is now politi- 
cally impossible. Sometimes they go further, and charge that all pro- 
posals under any circumstances to reduce particular wage rates 
directly in order to reduce unemployment are “antilabor.” But what 
they are themselves proposing, stated in bald terms, is to deceive labor 
by reducing real wage rates (that is, wage rates in terms of purchasing 
power) through an increase in prices. 

What they forget is that labor itself has become sophisticated; that 
the big unions employ labor economists who know about index num- 
bers, and that labor is not deceived. The policy, therefore, under pres- 
ent conditions, seems unlikely to accomplish either its economic or its 
political aims. For it is precisely the most powerful unions, whose 
wage rates are most likely to be in need of correction, that will insist 
that their wage rates be raised at least in proportion to any increase in 
the cost-of-living index. The unworkable relationships between prices 
and key wage rates, if the insistence of the powerful unions prevails, 
will remain. The wage-rate structure, in fact, may become even more 
distorted; for the great mass of unorganized workers, whose wage 
rates even before the inflation were not out of line (and may even 
have been unduly depressed through union exclusionism), will be 
penalized further during the transition by the rise in prices. 


The more sophisticated advocates of inflation, in brief, are disin- 
genuous. They do not state their case with complete candor; and they 
end by deceiving even themselves. They begin to talk of paper money, 
like the more naive inflationists, as if it were itself a form of wealth 
that could be created at will on the printing press. They even solemnly 
discuss a “multiplier,” by which every dollar printed and spent by the 
government becomes magically the equivalent of several dollars 
added to the wealth of the country. 

In brief, they divert both the public attention and their own from 
the real causes of any existing depression. For the real causes, most of 
the time, are maladjustments within the wage-cost-price structure: 
maladjustments between wages and prices, between prices of raw 

154 Economics in One Lesson 

materials and prices of finished goods, or between one price and 
another, or one wage and another. At some point these maladjust- 
ments have removed the incentive to produce, or have made it actu- 
ally impossible for production to continue; and through the organic 
interdependence of our exchange economy, depression spreads. Not 
until these maladjustments are corrected can full production and 
employment be resumed. 

True, inflation may sometimes correct them; but it is a heady and 
dangerous method. It makes its corrections not openly and honestly, 
but by the use of illusion. It is like getting people up an hour earlier 
only by making them believe that it is eight o’clock when it is really 
seven. It is perhaps no mere coincidence that a world which has to 
resort to the deception of turning all its clocks ahead an hour in order 
to accomplish this result should be a world that has to resort to infla- 
tion to accomplish an analogous result in the economic sphere. 

For inflation throws a veil of illusion over every economic process. 
It confuses and deceives almost everyone, including even those who 
suffer by it. We are all accustomed to measuring our income and 
wealth in terms of money. The mental habit is so strong that even 
professional economists and statisticians cannot consistently break it. 
It is not easy to see relationships always in terms of real goods and 
real welfare. Who among us does not feel richer and prouder when he 
is told that our national income has doubled (in terms of dollars, of 
course) compared with some pre-inflationary period? Even the clerk 
who used to get $25 a week and now gets $35 thinks that he must be 
in some way better off, though it costs him twice as much to live as it 
did when he was getting $25. He is of course not blind to the rise in 
the cost of living. But neither is he as fully aware of his real position 
as he would have been if his cost of living had not changed and if his 
money salary had been reduced to give him the same reduced purchasing 
power that he now has, in spite of his salary increase, because of higher 
prices. Inflation is the autosuggestion, the hypnotism, the anesthetic, 
that has dulled the pain of the operation for him. Inflation is the 
opium of the people. 

The Mirage of Inflation 155 


And this is precisely its political function. It is because inflation 
confuses everything that it is so consistently resorted to by our mod- 
ern “planned economy” governments. We saw in chapter 14, to take 
but one example, that the belief that public works necessarily create 
new jobs is false. If the money was raised by taxation, we saw, then for 
every dollar that the government spent on public works one less dol- 
lar was spent by the taxpayers to meet their own wants, and for every 
public job created one private job was destroyed. 

But suppose the public works are not paid for from the proceeds of 
taxation? Suppose they are paid for by deficit financing — that is, from 
the proceeds of government borrowing or from resorting to the print- 
ing press? Then the result just described does not seem to take place. 
The public works seem to be created out of “new” purchasing power. 
You cannot say that the purchasing power has been taken away from the 
taxpayers. For the moment the nation seems to have got something for 

But now, in accordance with our lesson, let us look at the longer 
consequences. The borrowing must someday be repaid. The govern- 
ment cannot keep piling up debt indefinitely; for if it tries, it will 
someday become bankrupt. As Adam Smith observed in 1776: 

When national debts have once been accumulated to a 
certain degree, there is scarce, I believe, a single instance 
of their having been fairly and completely paid. The lib- 
eration of the public revenue, if it has ever been brought 
about at all, has always been brought about by a bank- 
ruptcy; sometimes by an avowed one, but always by a real 
one, though frequently by a pretended payment. 

Yet when the government comes to repay the debt it has accumu- 
lated for public works, it must necessarily tax more heavily than it 
spends. In this later period, therefore, it must necessarily destroy more 
jobs than it creates. The extra heavy taxation then required does not 

156 Economics in One Lesson 

merely take away purchasing power; it also lowers or destroys incen- 
tives to production, and so reduces the total wealth and income of the 

The only escape from this conclusion is to assume (as of course 
the aposdes of spending always do) that the politicians in power will 
spend money only in what would otherwise have been depressed or 
“deflationary” periods, and will promptly pay the debt off in what 
would otherwise have been boom or “inflationary” periods. This is a 
beguiling fiction, but unfortunately the politicians in power have never 
acted that way. Economic forecasting, moreover, is so precarious, and 
the political pressures at work are of such a nature, that governments 
are unlikely ever to act that way. Deficit spending, once embarked 
upon, creates powerful vested interests which demand its continuance 
under all conditions. 

If no honest attempt is made to pay off the accumulated debt, and 
outright inflation is resorted to instead, then the results follow that we 
have already described. For the country as a whole cannot get any- 
thing without paying for it. Inflation itself is a form of taxation. It is 
perhaps the worst possible form, which usually bears hardest on those 
least able to pay. On the assumption that inflation affected everyone 
and everything evenly (which, we have seen, is never true), it would be 
tantamount to a flat sales tax of the same percentage on all commodi- 
ties, with the rate as high on bread and milk as on diamonds and furs. 
Or it might be thought of as equivalent to a flat tax of the same per- 
centage, without exemptions, on everyone’s income. It is a tax not 
only on every individual’s expenditures, but on his savings account 
and life insurance. It is, in fact, a flat capital levy, without exemptions, 
in which the poor man pays as high a percentage as the rich man. 

But the situation is even worse than this, because, as we have seen, 
inflation does not and cannot affect everyone evenly. Some suffer more 
than others. The poor may be more heavily taxed by inflation, in per- 
centage terms, than the rich. For inflation is a kind of tax that is out of 
control of the tax authorities. It strikes wantonly in all directions. The 
rate of tax imposed by inflation is not a fixed one: it cannot be deter- 
mined in advance. We know what it is today; we do not know what it 

The Mirage of Inflation 157 

will be tomorrow; and tomorrow we shall not know what it will be on 
the day after. 

Like every other tax, inflation acts to determine the individual and 
business policies we are all forced to follow. It discourages all pru- 
dence and thrift. It encourages squandering, gambling, reckless waste 
of all kinds. It often makes it more profitable to speculate than to pro- 
duce. It tears apart the whole fabric of stable economic relationships. 
Its inexcusable injustices drive men toward desperate remedies. It 
plants the seeds of fascism and communism. It leads men to demand 
totalitarian controls. It ends invariably in bitter disillusion and col- 

Chapter 23 

The Assault on Saving 


F rom time immemorial proverbial wisdom has taught the virtues of 
saving, and warned against the consequences of prodigality and 
waste. This proverbial wisdom has reflected the common ethical as 
well as the merely prudential judgments of mankind. But there have 
always been squanderers, and there have apparently always been theo- 
rists to rationalize their squandering. 

The classical economists, refuting the fallacies of their own day, 
showed that the saving policy that was in the best interests of the indi- 
vidual was also in the best interests of the nation. They showed that 
the rational saver, in making provision for his own future, was not 
hurting, but helping, the whole community. But today the ancient 
virtue of thrift, as well as its defense by the classical economists, is 
once more under attack, for allegedly new reasons, while the opposite 
doctrine of spending is in fashion. 

In order to make the fundamental issue as clear as possible, we 
cannot do better, I think, than to start with the classic example used 
by Bastiat. Let us imagine two brothers, then, one a spendthrift and 
the other a prudent man, each of whom has inherited a sum to yield 
him an income of $50,000 a year. We shall disregard the income tax, 


1 60 Economics in One Lesson 

and the question whether both brothers really ought to work for a liv- 
ing, because such questions are irrelevant to our present purpose. 

Alvin, then, the first brother, is a lavish spender. He spends not 
only by temperament, but on principle. He is a disciple (to go no fur- 
ther back) of Rodbertus, who declared in the middle of the nine- 
teenth century that capitalists “must expend their income to the last 
penny in comforts and luxuries,” for if they “determine to save . . . 
goods accumulate, and part of the workmen will have no work.” 1 
Alvin is always seen at the nightclubs; he tips handsomely; he main- 
tains a pretentious establishment, with plenty of servants; he has a 
couple of chauffeurs, and doesn’t stint himself in the number of cars 
he owns; he keeps a racing stable; he runs a yacht; he travels; he loads 
his wife down with diamond bracelets and fur coats; he gives expen- 
sive and useless presents to his friends. 

To do all this he has to dig into his capital. But what of it? If saving 
is a sin, dissaving must be a virtue; and in any case he is simply making 
up for the harm being done by the saving of his pinchpenny brother 

It need hardly be said that Alvin is a great favorite with the hat 
check girls, the waiters, the restaurateurs, the furriers, the jewelers, the 
luxury establishments of all kinds. They regard him as a public bene- 
factor. Certainly it is obvious to everyone that he is giving employment 
and spreading his money around. 

Compared with him brother Benjamin is much less popular. He is 
seldom seen at the jewelers, the furriers, or the nightclubs, and he does 
not call the headwaiters by their first names. Whereas Alvin spends 
not only the full $50,000 income each year but is digging into capital 
besides, Benjamin lives much more modestly and spends only about 
$25,000. Obviously, think the people who see only what hits them in 
the eye, he is providing less than half as much employment as Alvin, 
and the other $25,000 is as useless as if it did not exist. 

But let us see what Benjamin actually does with this other $25,000. 
On the average he gives $5,000 of it to charitable causes, including help 

tivarl Rodbertus, Overproduction and Crises (1850), p. 51. 

The Assault on Saving 161 

to friends in need. The families who are helped by these funds in turn 
spend them on groceries or clothing or living quarters. So the funds cre- 
ate as much employment as if Benjamin had spent them directly on him- 
self. The difference is that more people are made happy as consumers, 
and that production is going more into essential goods and less into lux- 
uries and superfluities. 

This last point is one that often gives Benjamin concern. His con- 
science sometimes troubles him even about the $25,000 he spends. 
The kind of vulgar display and reckless spending that Alvin indulges 
in, he thinks, not only helps to breed dissatisfaction and envy in those 
who find it hard to make a decent living, but actually increases their 
difficulties. At any given moment, as Benjamin sees it, the actual pro- 
ducing power of the nation is limited. The more of it that is diverted 
to producing frivolities and luxuries, the less there is left for produc- 
ing the essentials of life for those who are in need of them. 2 The less 
he withdraws from the existing stock of wealth for his own use, the 
more he leaves for others. Prudence in consumptive spending, he 
feels, mitigates the problems raised by the inequalities of wealth and 
income. He realizes that this consumptive restraint can be carried too 
far; but there ought to be some of it, he feels, in everyone whose 
income is substantially above the average. 

Now let us see, apart from Benjamin’s ideas, what happens to the 
$20,000 that he neither spends nor gives away. He does not let it pile 
up in his pocketbook, his bureau drawers, or in his safe. He either 
deposits it in a bank or he invests it. If he puts it either into a com- 
mercial or a savings bank, the bank either lends it to going businesses 
on short term for working capital, or uses it to buy securities. In other 
words, Benjamin invests his money either directiy or indirecdy. But 
when money is invested it is used to buy capital goods — houses or 
office buildings or factories or ships or motor trucks or machines. Any 
one of these projects puts as much money into circulation and gives 
as much employment as the same amount of money spent directiy on 

2 Cf. Hartley Withers, Poverty and Waste (1914). 

1 62 Economics in One Lesson 

“Saving” in short, in the modern world, is only another form of spending. The 

usual difference is that the money is turned over to someone else to 
spend on means to increase production. So far as giving employment is 
concerned, Benjamin’s “saving” and spending combined give as much 
as Alvin’s spending alone, and put as much money in circulation. The 
chief difference is that the employment provided by Alvin’s spending 
can be seen by anyone with one eye; but it is necessary to look a little 
more carefully, and to think a moment, to recognize that every dollar of 
Benjamin’s saving gives as much employment as every dollar that Alvin 
throws around. 

A dozen years roll by. Alvin is broke. He is no longer seen in the 
nightclubs and at the fashionable shops; and those whom he formerly 
patronized, when they speak of him, refer to him as something of a 
fool. He writes begging letters to Benjamin. And Benjamin, who con- 
tinues about the same ratio of spending to saving, provides more jobs 
than ever, because his income, through investment, has grown. His 
capital wealth is greater also. Moreover, because of his investments, 
the national wealth and income are greater; there are more factories 
and more production. 


So many fallacies have grown up about saving in recent years that 
they cannot all be answered by our example of the two brothers. It is 
necessary to devote some further space to them. Many stem from 
confusions so elementary as to seem incredible, particularly when 
found in economic writers of wide repute. The word “saving,” for 
example, is used sometimes to mean mere hoarding of money, and 
sometimes to mean investment, with no clear distinction, consistently 
maintained, between the two uses. 

Mere hoarding of hand-to-hand money, if it takes place irra- 
tionally, causelessly, and on a large scale, is in most economic situa- 
tions harmful. But this sort of hoarding is extremely rare. Something 
that looks like this, but should be carefully distinguished from it, often 
occurs after a downturn in business has got under way. Consumptive 
spending and investment are then both contracted. Consumers reduce 

The Assault on Saving 163 

their buying. They do this partly, indeed, because they fear they may 
lose their jobs, and they wish to conserve their resources: they have 
contracted their buying not because they wish to consume less but 
because they wish to make sure that their power to consume will be 
extended over a longer period if they do lose their jobs. 

But consumers reduce their buying for another reason. Prices of 
goods have probably fallen, and they fear a further fall. If they defer 
spending, they believe they will get more for their money. They do not 
wish to have their resources in goods that are falling in value, but in 
money which they expect (relatively) to rise in value. 

The same expectation prevents them from investing. They have 
lost their confidence in the profitability of business; or at least they 
believe that if they wait a few months they can buy stocks or bonds 
cheaper. We may think of them either as refusing to hold goods that 
may fall in value on their hands, or as holding money itself for a rise. 

It is a misnomer to call this temporary refusal to buy “saving.” It 
does not spring from the same motives as normal saving. And it is a 
still more serious error to say that this sort of “saving” is the cause of 
depressions. It is, on the contrary, the consequence of depressions. 

It is true that this refusal to buy may intensify and prolong a depres- 
sion once begun. But it does not itself originate the depression. At times 
when there is capricious government intervention in business, and when 
business does not know what the government is going to do next, uncer- 
tainty 7 is created. Profits are not reinvested. Firms and individuals allow 
cash balances to accumulate in their banks. They keep larger reserves 
against contingencies. This hoarding of cash may seem like the cause of 
a subsequent slowdown in business activity. The real cause, however, is 
the uncertainty brought about by the government policies. The larger 
cash balances of firms and individuals are merely one link in the chain 
of consequences from that uncertainty. To blame “excessive saving” for 
the business decline would be like blaming a fall in the price of apples 
not on a bumper crop but on the people who refuse to pay more for 
apples. But once people have decided to deride a practice or an institu- 
tion, any argument against it, no matter how illogical, is considered good 
enough. It is said that the various consumers’ goods industries are built 

1 64 Economics in One Lesson 

on the expectation of a certain demand, and that if people take to sav- 
ing they will disappoint this expectation and start a depression. This 
assertion rests primarily on the error we have already examined — that of 
forgetting that what is saved on consumers’ goods is spent on capital 
goods, and that “saving” does not necessarily mean even a dollar’s con- 
traction in total spending. The only element of truth in the contention is 
that any change that is sudden may be unsettling. It would be just as unset- 
tling if consumers suddenly switched their demand from one con- 
sumers’ good to another. It would be even more unsettling if former 
savers suddenly switched their demand from capital goods to con- 
sumers’ goods. 

Still another objection is made against saving. It is said to be just 
downright silly. The nineteenth century is derided for its supposed 
inculcation of the doctrine that mankind through saving should go 
on making itself a larger and larger cake without ever eating the cake. 
This picture of the process is itself naive and childish. It can best be 
disposed of, perhaps, by putting before ourselves a somewhat more 
realistic picture of what actually takes place. 

Let us picture to ourselves, then, a nation that collectively saves every 
year about 20 percent of all it produces in that year. This figure greatly 
overstates the amount of net saving that has occurred historically in the 
United States, 3 but it is a round figure that is easily handled, and it gives 
the benefit of every doubt to those who believe that we have been “over- 

Now as a result of this annual saving and investment, the total 
annual production of the country will increase each year. (To isolate the 
problem we are ignoring for the moment booms, slumps, or other fluc- 
tuations.) Let us say that this annual increase in production is 2 11 /42 per- 
centage points. (Percentage points are taken instead of a compounded 
percentage merely to simplify the arithmetic.) The picture that we get for 

historically 20 percent would represent approximately the gross amount of the gross 
national product devoted each year to capital formation (excluding consumers’ equip- 
ment). When allowance is made for capital consumption, however, net annual savings have 
been closer to 12 percent. Cf. George Terborgh, The Bogey of Economic Maturity (Chicago: 
Machinery and Allied Products Institute, 1945). 

The Assault on Saving 165 

an eleven-year period, say, would then run something like this in terms 
of index numbers: 






















































*This of course assumes the process of saving and investment to 
have been already under way at the same rate. 

The first thing to be noticed about this table is that total production 
increases each year because of the saving and would not have increased with- 
out it. (It is possible no doubt to imagine that improvements and new 
inventions merely in replaced machinery and other capital goods of a value 
no greater than the old would increase the national productivity; but this 
increase would amount to very litde, and the argument in any case 
assumes enough prior investment to have made the existing machinery 
possible.) The saving has been used year after year to increase the quan- 
tity or improve the quality of existing machinery, and so to increase the 
nation’s output of goods. There is, it is true (if that for some strange rea- 
son is considered an objection), a larger and larger “cake” each year. 
Each year, it is true, not all of the currendy produced “cake” is con- 
sumed. But there is no irrational or cumulative consumer restraint. For 

166 Economics in One Lesson 

each year a larger and larger cake is in fact consumed; until, at the end of 
eleven years (in our illustration), the annual consumers’ cake alone is 
equal to the combined consumers’ and producers’ cakes of the first year. 
Moreover, the capital equipment, the ability to produce goods, is itself 25 
percent greater than in the first year. 

Let us observe a few other points. The fact that 20 percent of the 
national income goes each year for saving does not upset the con- 
sumers’ goods industries in the least. If they sold only the 80 units 
they produced in the first year (and there were no rise in prices caused 
by unsatisfied demand) they would certainly not be foolish enough to 
build their production plans on the assumption that they were going 
to sell 100 units in the second year. The consumers’ goods industries, 
in other words, are already geared to the assumption that the past situa- 
tion in regard to the rate of savings will continue. Only an unexpected 
sudden and substantial increase in savings would unsetde them and leave 
them with unsold goods. 

But the same unsetdement, as we have already observed, would be 
caused in the capital goods industries by a sudden and substantial decrease 
in savings. If money that would previously have been used for savings 
were thrown into the purchase of consumers’ goods, it would not 
increase employment but merely lead to an increase in the price of 
consumption goods and to a decrease in the price of capital goods. Its 
first effect on net balance would be to force shifts in employment and 
temporarily to decrease employment by its effect on the capital goods 
industries. And its long-run effect would be to reduce production 
below the level that would otherwise have been achieved. 


The enemies of saving are not through. They begin by drawing a 
distinction, which is proper enough, between “savings” and “invest- 
ment.” But then they start to talk as if the two were independent vari- 
ables and as if it were merely an accident that they should ever equal 
each other. These writers paint a portentous picture. On the one side 
are savers automatically, poindessly, stupidly continuing to save; on the 
other side are limited “investment opportunities” that cannot absorb 

The Assault on Saving 167 

this saving. The result, alas, is stagnation. The only solution, they 
declare, is for the government to expropriate these stupid and harm- 
ful savings and to invent its own projects, even if these are only use- 
less ditches or pyramids, to use up the money and provide employ- 

There is so much that is false in this picture and “solution” that we 
can here point only to some of the main fallacies. “Savings” can 
exceed “investment” only by the amounts that are actually hoarded in 
cashd Few people nowadays, in a modern industrial community like the 
United States, hoard coins and bills in stockings or under mattresses. 
To the small extent that this may occur, it has already been reflected 
in the production plans of business and in the price level. It is not 
ordinarily even cumulative: dishoarding, as eccentric recluses die and 
their hoards are discovered and dissipated, probably offsets new 
hoarding. In fact, the whole amount involved is probably insignificant 
in its effect on business activity. 

If money is kept either in savings banks or commercial banks, as 
we have already seen, the banks are eager to lend and invest it. They 
cannot afford to have idle funds. The only thing that will cause peo- 
ple generally to increase their holdings of cash, or that will cause 
banks to hold funds idle and lose the interest on them, is, as we have 
seen, either fear that prices of goods are going to fall or the fear of 
banks that they will be taking too great a risk with their principal. But 
this means that signs of a depression have already appeared, and have 
caused the hoarding, rather than that the hoarding has started the 

Apart from this negligible hoarding of cash, then (and even this 
exception might be thought of as a direct “investment” in money 
itself) “savings” and “investment” are brought into equilibrium with 

4 Many of the differences between economists in the diverse views now expressed on this 
subject are merely the result of differences in definition. “Savings” and “investment” may 
be so defined as to be identical, and therefore necessarily equal. Here I am choosing to 
define “savings” in terms of money and “investment” in terms of goods. This corre- 
sponds roughly with the common use of the words, which is, however, not always con- 

168 Economics in One Lesson 

each other in the same way that the supply of and demand for any 
commodity are brought into equilibrium. For we may define “savings” 
and “investment” as constituting respectively the supply of and 
demand for new capital. And just as the supply of and demand for any 
other commodity are equalized by price, so the supply of and demand 
for capital are equalized by interest rates. The interest rate is merely 
the special name for the price of loaned capital. It is a price like any 

This whole subject has been so appallingly confused in recent 
years by complicated sophistries and disastrous governmental policies 
based upon them that one almost despairs of getting back to common 
sense and sanity about it. There is a psychopathic fear of “excessive” 
interest rates. It is argued that if interest rates are too high it will not 
be profitable for industry to borrow and invest in new plants and 
machines. This argument has been so effective that governments 
everywhere in recent decades have pursued artificial “cheap money” 
policies. But the argument, in its concern with increasing the demand 
for capital, overlooks the effect of these policies on the supply of cap- 
ital. It is one more example of the fallacy of looking at the effects of 
a policy only on one group and forgetting the effects on another. 

If interest rates are artificially kept too low in relation to risks, 
funds will neither be saved nor lent. The cheap-money proponents 
believe that saving goes on automatically, regardless of the interest 
rate, because the sated rich have nothing else that they can do with 
their money. They do not stop to tell us at precisely what personal 
income level a man saves a fixed minimum amount regardless of the 
rate of interest or the risk at which he can lend it. The fact is that, 
though the volume of saving of the very rich is doubtless affected 
much less proportionately than that of the moderately well-off by 
changes in the interest rate, practically everyone’s saving is affected in 
some degree. To argue, on the basis of an extreme example, that the 
volume of real savings would not be reduced by a substantial reduc- 
tion in the interest rate, is like arguing that the total production of 
sugar would not be reduced by a substantial fall of its price because 
the efficient, low-cost producers would still raise as much as before. 

The Assault on Saving 169 

The argument overlooks the marginal saver, and even, indeed, the 
great majority of savers. 

The effect of keeping interest rates artificially low, in fact, is even- 
tually the same as that of keeping any other price below the natural 
market. It increases demand and reduces supply. It increases the 
demand for capital and reduces the supply of real capital. It brings 
about a scarcity. It creates economic distortions. It is true, no doubt, 
that an artificial reduction in the interest rate encourages increased 
borrowing. It tends, in fact, to encourage highly speculative ventures 
that cannot continue except under the artificial conditions that gave 
them birth. On the supply side, the artificial reduction of interest rates 
discourages normal thrift and saving. It brings about a comparative 
shortage of real capital. 

The money rate can, indeed, be kept artificially low only by contin- 
uous new injections of currency or bank credit in place of real sav- 
ings. This can create the illusion of more capital just as the addition 
of water can create the illusion of more milk. But it is a policy of con- 
tinuous inflation. It is obviously a process involving cumulative dan- 
ger. The money rate will rise and a crisis will develop if the inflation 
is reversed, or merely brought to a halt, or even continued at a dimin- 
ished rate. Cheap money policies, in short, eventually bring about far 
more violent oscillations in business than those they are designed to 
remedy or prevent. If no effort is made to tamper with money rates 
through inflationary governmental policies, increased savings create 
their own demand by lowering interest rates in a natural manner. The 
greater supply of savings seeking investment forces savers to accept 
lower rates. But lower rates also mean that more enterprises can afford 
to borrow because their prospective profit on the new machines or 
plants they buy with the proceeds seems likely to exceed what they 
have to pay for the borrowed funds. 


We come now to the last fallacy about saving with which I intend 
to deal. This is the frequent assumption that there is a fixed limit to 
the amount of new capital that can be absorbed, or even that the limit 

170 Economics in One Lesson 

of capital expansion has already been reached. It is incredible that 
such a view could prevail even among the ignorant, let alone that it 
could be held by any trained economist. Almost the whole wealth of 
the modern world, nearly everything that distinguishes it from the 
preindustrial world of the seventeenth century, consists of its accu- 
mulated capital. 

This capital is made up in part of many things that might better be 
called consumers’ durable goods — automobiles, refrigerators, furni- 
ture, schools, colleges, churches, libraries, hospitals, and above all pri- 
vate homes. Never in the history of the world has there been enough 
of these. There is still, with the postponed building and outright 
destruction of World War II, a desperate shortage of them. But even 
if there were enough homes from a purely numerical point of view, 
qualitative improvements are possible and desirable without definite 
limit in all but the very best houses. 

The second part of capital is what we may call capital proper. It 
consists of the tools of production, including everything from the 
crudest axe, knife, or plow to the finest machine tool, the greatest 
electric generator or cyclotron, or the most wonderfully equipped fac- 
tory. Here, too, quantitatively and especially qualitatively, there is no 
limit to the expansion that is possible and desirable. There will not be 
a “surplus” of capital until the most backward country is as well- 
equipped technologically as the most advanced, until the most ineffi- 
cient factory in America is brought abreast of the factory with the lat- 
est and most elaborate equipment, and until the most modern tools of 
production have reached a point where human ingenuity is at a dead 
end, and can improve them no further. As long as any of these con- 
ditions remain unfulfilled, there will be indefinite room for more cap- 

But how can the additional capital be “absorbed”? How can it be 
“paid for”? If it is set aside and saved, it will absorb itself and pay for 
itself. For producers invest in new capital goods — that is, they buy 
new and better and more ingenious tools — because these tools reduce 
cost of production. They either bring into existence goods that completely 
unaided hand labor could not bring into existence at all (and this now 

The Assault on Saving 171 

includes most of the goods around us — books, typewriters, automo- 
biles, locomotives, suspension bridges); or they increase enormously 
the quantities in which these can be produced; or (and this is merely 
saying these things in a different way) they reduce unit costs of pro- 
duction. And as there is no assignable limit to the extent to which unit 
costs of production can be reduced — until everything can be pro- 
duced at no cost at all — there is no assignable limit to the amount of 
new capital that can be absorbed. The steady reduction of unit costs 
of production by the addition of new capital does either one of two 
things, or both. It reduces the costs of goods to consumers, and it 
increases the wages of the labor that uses the new machines because 
it increases the productive power of that labor. Thus a new machine 
benefits both the people who work on it directly and the great body 
of consumers. In the case of consumers we may say either that it sup- 
plies them with more and better goods for the same money, or, what 
is the same thing, that it increases their real incomes. In the case of the 
workers who use the new machines it increases their real wages in a 
double way by increasing their money wages as well. A typical illustra- 
tion is the automobile business. The American automobile industry 
pays the highest wages in the world, and among the very highest even 
in America. Yet American motor car makers can undersell the rest of 
the world, because their unit cost is lower. And the secret is that the 
capital used in making American automobiles is greater per worker 
and per car than anywhere else in the world. 

And yet there are people who think we have reached the end of 
this process, 5 and still others who think that even if we haven’t, the 
world is foolish to go on saving and adding to its stock of capital. 

It should not be difficult to decide, after our analysis, with whom 
the real folly lies. 

5 For a statistical refutation of this fallacy consult George Terborgh, The Bogey ofEconomic 
Maturity (1945). 

Part Three: The Lesson Restated 

Chapter 24 

The Lesson Restated 


E conomics, as we have now seen again and again, is a science of 
recognizing secondary consequences. It is also a science of seeing 
general consequences. It is the science of tracing the effects of some 
proposed or existing policy not only on some special interest in the short 
run, but on the general interest in the long run. 

This is the lesson that has been the special concern of this book. 
We stated it first in skeleton form, and then put flesh and skin on it 
through more than a score of practical applications. 

But in the course of specific illustration we have found hints of 
other general lessons; and we should do well to state these lessons to 
ourselves more clearly. 

In seeing that economics is a science of tracing consequences, we 
must have become aware that, like logic and mathematics, it is a sci- 
ence of recognizing inevitable implications. 

We may illustrate this by an elementary equation in algebra. Sup- 
pose we say that if x = 5 then x +y =12. The “solution” to this equa- 
tion is thatj equals 7; but this is so precisely because the equation tells 
us in effect thatj equals 7. It does not make that assertion directly, but 
it inevitably implies it. 

What is true of this elementary equation is true of the most com- 
plicated and abstruse equations encountered in mathematics. The 


176 Economics in One Lesson 

answer already lies in the statement ofthe problem. It must, it is true, be “worked 
out.” The result, it is true, may sometimes come to the man who 
works out the equation as a stunning surprise. He may even have a 
sense of discovering something entirely new — a thrill like that of 
“some watcher of the skies, when a new planet swims into his ken.” 
His sense of discovery may be justified by the theoretical or practical 
consequences of his answer. Yet his answer was already contained in 
the formulation of the problem. It was merely not recognized at once. 
For mathematics reminds us that inevitable implications are not nec- 
essarily obvious implications. 

All this is equally true of economics. In this respect economics 
might be compared also to engineering. When an engineer has a prob- 
lem, he must first determine all the facts bearing on that problem. If 
he designs a bridge to span two points, he must first know the exact 
distance between those two points, their precise topographical nature, 
the maximum load his bridge will be designed to carry, the tensile and 
compressive strength of the steel or other material of which the 
bridge is to be built, and the stresses and strains to which it may be 
subjected. Much of this factual research has already been done for 
him by others. His predecessors, also, have already evolved elaborate 
mathematical equations by which, knowing the strength of his mate- 
rials and the stresses to which they will be subjected, he can determine 
the necessary diameter, shape, number, and structure of his towers, 
cables, and girders. 

In the same way the economist, assigned a practical problem, must 
know both the essential facts of that problem and the valid deduc- 
tions to be drawn from those facts. The deductive side of economics 
is no less important than the factual. One can say of it what Santayana 
says of logic (and what could be equally well said of mathematics), 
that it “traces the radiation of truth,” so that “when one term of a 
logical system is known to describe a fact, the whole system attaching 
to that term becomes, as it were, incandescent.” 1 

'George Santayana, The Realm of Truth (New York: Scribners, 1938), p. 16. 

The Lesson Restated 177 

Now few people recognize the necessary implications of the eco- 
nomic statements they are constantly making. When they say that the 
way to economic salvation is to increase “credit,” it is just as if they 
said that the way to economic salvation is to increase debt: these are 
different names for the same thing seen from opposite sides. When 
they say that the way to prosperity is to increase farm prices, it is like 
saying that the way to prosperity is to make food dearer for the city 
worker. When they say that the way to national wealth is to pay out 
governmental subsidies, they are in effect saying that the way to 
national wealth is to increase taxes. When they make it a main objec- 
tive to increase exports, most of them do not realize that they neces- 
sarily make it a main objective ultimately to increase imports. When 
they say, under nearly all conditions, that the way to recovery is to 
increase wage rates, they have found only another way of saying that 
the way to recovery is to increase costs of production. 

It does not necessarily follow, because each of these propositions, 
like a coin, has its reverse side, or because the equivalent proposition, 
or the other name for the remedy, sounds much less attractive, that the 
original proposal is under all conditions unsound. There may be times 
when an increase in debt is a minor consideration as against the gains 
achieved with the borrowed funds; when a government subsidy is 
unavoidable to achieve a certain purpose; when a given industry can 
afford an increase in production costs, and so on. But we ought to 
make sure in each case that both sides of the coin have been consid- 
ered, that all the implications of a proposal have been studied. And 
this is seldom done. 


The analysis of our illustrations has taught us another incidental 
lesson. This is that, when we study the effects of various proposals, not 
merely on special groups in the short run, but on all groups in the long 
run, the conclusions we arrive at usually correspond with those of 
unsophisticated common sense. It would not occur to anyone unac- 
quainted with the prevailing economic half literacy that it is good to 
have windows broken and cities destroyed; that it is anything but waste 

178 Economics in One Lesson 

to create needless public projects; that it is dangerous to let idle hordes 
of men return to work; that machines which increase the production 
of wealth and economize human effort are to be dreaded; that 
obstructions to free production and free consumption increase wealth; 
that a nation grows richer by forcing other nations to take its goods for 
less than they cost to produce; that saving is stupid or wicked and that 
dissipation brings prosperity. 

“What is prudence in the conduct of every private family,” said 
Adam Smith’s strong common sense in reply to the sophists of his 
time, “can scarce be folly in that of a great kingdom.” But lesser men 
get lost in complications. They do not re-examine their reasoning even 
when they emerge with conclusions that are palpably absurd. The 
reader, depending upon his own beliefs, may or may not accept the 
aphorism of Bacon that “A little philosophy inclineth man’s mind to 
atheism, but depth in philosophy bringeth men’s minds about to reli- 
gion.” It is certainly true, however, that a little economics can easily 
lead to the paradoxical and preposterous conclusions we have just 
rehearsed, but that depth in economics brings men back to common 
sense. For depth in economics consists in looking for all the conse- 
quences of a policy instead of merely resting one’s gaze on those 
immediately visible. 


In the course of our study, also, we have rediscovered an old 
friend. He is the Forgotten Man of William Graham Sumner. The 
reader will remember that in Sumner’s essay, which appeared in 1883: 

As soon as A observes something which seems to him 
to be wrong, from which X is suffering, A talks it over 
with B, and A and B then propose to get a law passed to 
remedy the evil and help X. Their law always proposes 
to determine what C shall do for X or, in the better case, 
what A, B and C shall do for X. . . . What I want to do 
is to look up C. ... I call him the Forgotten Man. . . . He 
is the man who never is thought of. He is the victim of 

The Lesson Restated 179 

the reformer, social speculator, and philanthropist, and I 
hope to show you before I get through that he deserves 
your notice both for his character and for the many bur- 
dens which are laid upon him. 

It is a historic irony that when this phrase, the Forgotten Man, was 
revived in the 1 930s, it was applied, not to C, but to X; and C, who was 
then being asked to support still more X’s, was more completely for- 
gotten than ever. It is C, the Forgotten Man, who is always called upon 
to stanch the politician’s bleeding heart by paying for his vicarious gen- 


Our study of our lesson would not be complete if, before we took 
leave of it, we neglected to observe that the fundamental fallacy with 
which we have been concerned arises not accidentally but systemati- 
cally. It is an almost inevitable result, in fact, of the division of labor. 

In a primitive community, or among pioneers, before the division 
of labor has arisen, a man works solely for himself or his immediate 
family. What he consumes is identical with what he produces. There is 
always a direct and immediate connection between his output and his 

But when an elaborate and minute division of labor has set in, this 
direct and immediate connection ceases to exist. I do not make all the 
things I consume but, perhaps, only one of them. With the income I 
derive from making this one commodity, or rendering this one service, 
I buy all the rest. I wish the price of everything I buy to be low, but it 
is in my interest for the price of the commodity or services that I have 
to sell to be high. Therefore, though I wish to see abundance in every- 
thing else, it is in my interest for scarcity to exist in the very thing that 
it is my business to supply. The greater the scarcity, compared to every- 
thing else, in this one thing that I supply, the higher will be the reward 
that I can get for my efforts. 

1 80 Economics in One Lesson 

This does not necessarily mean that I will restrict my own efforts 
or my own output. In fact, if I am only one of a substantial number 
of people supplying that commodity or service, and if free competi- 
tion exists in my line, this individual restriction will not pay me. On 
the contrary, if I am a grower of wheat, say, I want my particular crop 
to be as large as possible. But if I am concerned only with my own 
material welfare, and have no humanitarian scruples, I want the out- 
put of all other wheat growers to be as low as possible; for I want 
scarcity in wheat (and in any foodstuff that can be substituted for it) 
so that my particular crop may command the highest possible price. 

Ordinarily these selfish feelings would have no effect on the total 
production of wheat. Wherever competition exists, in fact, each pro- 
ducer is compelled to put forth his utmost efforts to raise the highest 
possible crop on his own land. In this way the forces of self-interest 
(which, for good or evil, are more persistently powerful than those of 
altruism) are harnessed to maximum output. 

But if it is possible for wheat growers or any other group of pro- 
ducers to combine to eliminate competition, and if the government 
permits or encourages such a course, the situation changes. The wheat 
growers may be able to persuade the national government — or, better, 
a world organization — to force all of them to reduce pro rata the 
acreage planted to wheat. In this way they will bring about a shortage 
and raise the price of wheat; and if the rise in the price per bushel is 
proportionately greater, as it well may be, than the reduction in out- 
put, then the wheat growers as a whole will be better off. They will get 
more money; they will be able to buy more of everything else. Every- 
body else, it is true, will be worse off; because, other things equal, 
everyone else will have to give more of what he produces to get less 
of what the wheat grower produces. So the nation as a whole will be 
just that much poorer. It will be poorer by the amount of wheat that 
has not been grown. But those who look only at the wheat farmers 
will see a gain, and miss the more than offsetting loss. 

And this applies in every other line. If because of unusual weather 
conditions there is a sudden increase in the crop of oranges, all the 
consumers will benefit. The world will be richer by that many more 

The lesson Restated 181 

oranges. Oranges will be cheaper. But that very fact may make the 
orange growers as a group poorer than before, unless the greater sup- 
ply of oranges compensates or more than compensates for the lower 
price. Certainly if under such conditions my particular crop of 
oranges is no larger than usual, then I am certain to lose by the lower 
price brought about by general plenty. 

And what applies to changes in supply applies to changes in 
demand, whether brought about by new inventions and discoveries or 
by changes in taste. A new cotton-picking machine, though it may 
reduce the cost of cotton underwear and shirts to everyone, and 
increase the general wealth, will throw thousands of cotton pickers 
out of work. A new textile machine, weaving a better cloth at a faster 
rate, will make thousands of old machines obsolete, and wipe out part 
of the capital value invested in them, so making poorer the owners of 
those machines. The development of atomic power, though it could 
confer unimaginable blessings on mankind, is something that is 
dreaded by the owners of coal mines and oil wells. 

just as there is no technical improvement that would not hurt 
someone, so there is no change in public taste or morals, even for the 
better, that would not hurt someone. An increase in sobriety would 
put thousands of bartenders out of business. A decline in gambling 
would force croupiers and racing touts to seek more productive occu- 
pations. A growth of male chastity would ruin the oldest profession 
in the world. 

But it is not merely those who deliberately pander to men’s vices 
who would be hurt by a sudden improvement in public morals. Among 
those who would be hurt most are precisely those whose business it is 
to improve those morals. Preachers would have less to complain about; 
reformers would lose their causes; the demand for their services and 
contributions for their support would decline. If there were no crimi- 
nals we should need fewer lawyers, judges, and firemen, and no jailers, 
no locksmiths, and (except for such services as untangling traffic snarls) 
even no policemen. 

Under a system of division of labor, in short, it is difficult to think 
of a greater fulfillment of any human need which would not, at least 

1 82 Economics in One Lesson 

temporarily, hurt some of the people who have made investments or 
painfully acquired skill to meet that precise need. If progress were 
completely even all around the circle, this antagonism between the 
interests of the whole community and of the specialized group would 
not, if it were noticed at all, present any serious problem. If in the 
same year as the world wheat crop increased, my own crop increased 
in the same proportion; if the crop of oranges and all other agricul- 
tural products increased correspondingly, and if the output of all 
industrial goods also rose and their unit cost of production fell to cor- 
respond, then I as a wheat grower would not suffer because the out- 
put of wheat had increased. The price that I got for a bushel of wheat 
might decline. The total sum that I realized from my larger output 
might decline. But if I could also because of increased supplies buy 
the output of everyone else cheaper, then I should have no real cause 
to complain. If the price of everything else dropped in exactly the 
same ratio as the decline in the price of my wheat, I should be better 
off, in fact, exactly in proportion to my increased total crop; and 
everyone else, likewise, would benefit proportionately from the 
increased supplies of all goods and services. 

But economic progress never has taken place and probably never 
will take place in this completely uniform way. Advance occurs now in 
this branch of production and now in that. And if there is a sudden 
increase in the supply of the thing I help to produce, or if a new 
invention or discovery makes what I produce no longer necessary, 
then the gain to the world is a tragedy to me and to the productive 
group to which I belong. 

Now it is often not the diffused gain of the increased supply or new 
discovery that most forcibly strikes even the disinterested observer, but 
the concentrated loss. The fact that there is more and cheaper coffee 
for everyone is lost sight of; what is seen is merely that some coffee 
growers cannot make a living at the lower price. The increased output 
of shoes at lower cost by the new machine is forgotten; what is seen 
is a group of men and women thrown out of work. It is altogether 
proper — it is, in fact, essential to a full understanding of the prob- 
lem — that the plight of these groups be recognized, that they be dealt 

The Lesson Restated 183 

with sympathetically, and that we try to see whether some of the gains 
from this specialized progress cannot be used to help the victims find 
a productive role elsewhere. 

But the solution is never to reduce supplies arbitrarily, to prevent 
further inventions or discoveries, or to support people for continuing 
to perform a service that has lost its value. Yet this is what the world 
has repeatedly sought to do by protective tariffs, by the destruction of 
machinery, by the burning of coffee, by a thousand restriction 
schemes. This is the insane doctrine of wealth through scarcity. 

It is a doctrine that may always be privately true, unfortunately, for 
any particular group of producers considered in isolation — if they 
can make scarce the one thing they have to sell while keeping abun- 
dant all the things they have to buy. But it is a doctrine that is always 
publicly false. It can never be applied all around the circle. For its 
application would mean economic suicide. 

And this is our lesson in its most generalized form. For many 
things that seem to be true when we concentrate on a single economic 
group are seen to be illusions when the interests of everyone, as con- 
sumer no less than as producer, are considered. 

To see the problem as a whole, and not in fragments: that is the 
goal of economic science. 


American AAA plan, 79 
American Mercury , x 
American Scholar, The , xiv 
Anderson, Benjamin M. 

“A Refutation of Keynes’ Attack 
on the Doctrine that Aggregate 
Supply Creates Aggregate 
Demand,” in Financing American 
Prosperity, 152n 

Value of Money, The, 148n 
Arkwright, Richard, 34 
armed forces, disbandment of, 51-52 

Bastiat, Frederic 

broken window example, viii, ix, 
11-12, 13 

Ce qu’on voit et ce qtt’on ne voit fas, 

savings vs. spending example, 

Bituminous Coal Act of 1937, 84 
black market, 110—11 
Bogey of Economic Maturity, The (Ter- 
bough), 164n, 171n 
broken window example (Bastiat), 
viii, ix, 11-12, 13 

bureaucrats, disbandment of, 52-54 

capital absorption, 169-71 
Ce qu’on voit et ce qu’on ne voit fas (Bas- 
tiat), xii 

coal industry, 83-84 
Cohen, Morris R. 

Reason and Nature, xii 
commodities, controls for, 26, 78, 79, 

Commonsense of Political Economy 
(Wicksteed), xii 
cotton-spinning industry, 34 
credit, government, 25-32, 71-73 
See also commodities, controls for 
Crusoe economics, 91 

deficit financing by government, 
51-52, 155-56 

demand and supply, 15-16, 91-92, 

97, 99, 138, 181 

depressions, errors concerning causes 
and cures 

disbandment of bureaucrats, 

“enough to buy back the prod- 
uct” concept of wages, 133 
industry failures, 83 
inflation as cure for, 147, 151 
machinery and unemployment, 36 


186 Economics in One Lesson 

parity prices as cure for, 76 
and savings, 163, 164, 167 
wage/cost/price maladjustments, 

destruction, fallacy regarding eco- 
nomic benefits of, 13—16 
disbandment of government person- 
nel, 51-54 

division of labor, 15, 33, 91, 179, 181 
See also subdivision of labor 
Douglas, Major, xiii 
Douglas, Paul H. 

Theory of Wages, The, 1 36 

economic equilibrium, 138—39 
economic fallacies, summary of cen- 
tral concepts, 3-7 
Edwards, Corwin, 36-37 
employment, full, 41, 55—57, 78, 139, 

“enough to buy back the product” 
concept of wages, 133-39 
ever-normal granary, 99—100 
exports, 69-73, 80, 147 
See also tariffs 

fallacies, economic, summary of cen- 
tral concepts, 3-7 
farms and farming 

controls for production, 97-103 
government credit, 25—29 
parity prices, 75-81 
Federal Wage-Hour Law, 47 
Federalist Tapers (Hamilton), 110 
Felkin, William 

History of the Machine-Wrought 
Hosiery Manufacturers , 34 
Financing American Prosperity, 1 52n 
foreign exchange, 70, 151 
foreign governments, government 
loans to, 71-73 

full employment, 41, 55—57, 78, 139, 

Full Production bills, 56 

gold standard, 70, 151 
government, deficit financing by, 
51-52, 155-56 

government credit, 25—32, 71—73 
See also commodities, contols for 
government personnel, disbandment 
of, 52-54 

government price-fixing. See price-fix- 
ing by the government 
government subsidies. See subsidies, 
Guffey Act, 84 

Hamilton, Alexander 
Federalist Tapers, 110 
Hansen, Alvin, xiii 
Histoiy of the Machine-Wrought Hosieiy 
Manufacturers (Felkin), 34 
hoarding of money, 162—64 
Home Owners Loan Corporation, 

Human Action (Mises), vii 

imports, 69-73, 80, 147 
See also tariffs 

Industrial Revolution, 34, 41, 42 
industries, schemes for saving, 83-87 

deceptive nature of, 153-55 
desire for as a producer, 113 
effects of, 147-53 
and government activities, 18, 25, 

reasons for appeal, 145M-7 
and savings, 169 
and wage increases, 49 
wartime, 14, 16 

Index 187 

interest rates and savings, 168-69 
investments and savings, 162-69 

Keynes, John Maynard, xiii, 152n 
Knight, Frank H. 

Risk, Uncertainty and Profit, 142 

labor unions. See unions, labor 
laisse^faire economics, 6, 85 
loans from government, 25—32, 


See also commodities, contols for 
loans to government, 51-52, 155-56 
Ludditism, ix 

machinery and unemployment, 

33-43, 181 

Man, Economy, and State (Rothbard), vii 
Marshall, Alfred 

Principles of Economics, 152n 
Marx, Karl, xiii 
Marxists, 133 
Mencken, H.L., x 
Mill, John Stuart, 1 5 

Principles of Political Economy, 1 52n 
minimum wage laws, viii— ix, 115—119 
Mises, Ludwig von, x, xii, xiv 
Human Action, vii 
Theory of Money and Credit, The, 

Nation, The, x 

National Railroad Adjustment Board, 

New Deal, x, 31-32, 75-76 
New Leader, xiv 
New York Times, x, xiv, 77 
Newsweek, x 
Norris Dam, 22 

Office of Price Administration, 107 
overexpansion of industries and 
inflation, 150—51 

Overproduction and Crises (Rodbertus), 

parity prices, 75-81, 85, 101 
Pigou, A.C. 

Theory of Unemployment, 136 
pin making industry, 33—34 
Poverty and Waste (Withers), 161 
President’s Commission on Full 
Employment, 56 
price system, 89-95 
price-fixing by the government, xiii, 
84, 105-13, 142-43, 148 
Principles of Economics (Marshall), 152n 
Principles of Political Economy (Mill), 


effects of government credit on, 

effects of taxes on, 23-24 
profits, function of, 141-44 
public works, viii, 17-22, 145, 155-56 

rationing, 107-10 
real wealth, 146, 152 
Realm of Truth, The (Santayana), 176 
Reason and Nature (Cohen), xii 
Recent Economic Changes (Wells), 35 
Reconstruction Finance Corporation, 

“Refutation of Keynes’ Attack on the 
Doctrine that Aggregate Supply 
Creates Aggregate Demand,” in 
Financing American Prosperity (Ander- 
son), 152n 

relief programs, 117-18, 126 
restrictions to farm production, 

Risk, Uncertainty and Prof l (Knight), 142 

188 Economics in One Lesson 

Robinson Crusoe, 90 
Rodbertus, Karl 

Overproduction and Crises, 1 60 
Roosevelt, Eleanor, vii, ix, 37 
Rothbard, Murray 

Man, Economy, and State, vii 

Saint Joan (Shaw), 21 
Santayana, George, 36 

Realm of Truth, The, 176 

Bastiat’s savings vs. spending 
example, 159-62 
capital absorption and, 169-71 
effects on production, 1 64-66 
hoarding versus, 162—64 
investments and, 162-69 
scarcity economics, 93 
Shaw, Bernard 
Saint Joan, 21 
silver industry, 83-84 
Smith, Adam, 146, 155, 178 
Wealth of Nations, The, 33-34, 

social credit, 147 
socialism, 30 

soldiers, disbandment of, 51-52 
speculators (for commodities), 98-99 
spread-the-work schemes, 45-50 
stocking industry, 34, 42 
strikes, 123 

subdivision of labor, 45-46 
See also division of labor 
subsidies, government 
for businesses, 31-32 
for exports, 72-73 
and parity prices, 77, 79, 80 
price-fixing by the government, 
107, 108-09, 113 

schemes for saving industries, 86-87 
Sumner, William Graham, 178—79 
superinflation, 151—52 

supply and demand, 15-16, 91-92, 

97, 99, 138, 181 
Swiss Family Robinson, 90 

tariffs, 59-68, 75, 79-81, 83, 85, 86 
taxes, effects on production, 23-24 
taxes and public works, 1 7-22 
technocrats, 35-36 
technological improvements and 
unemployment, 33—43, 181 
Temporary National Economic Com- 
mittee (TNEC), 36, 141-42 
Tennessee Valley Authority (TVA), 

Terbough, George 

Bogey of Economic Maturity, The, 
164n, 171n 
textile industries, 41 
Theory of Money and Credit, The 
(Mises), 148n 

Theory of Unemployment, The (Pigou), 

Theory of Wages, The (Douglas), 136 
TNEC (Temporary National Eco- 
nomic Committee), 36, 141—42 
troops, disbandment of, 51-52 
TVA (Tennessee Valley Authority), 

U.S. Office of Price Administration, 

unemployment and machinery, 33—43 
unions, labor 

labor practices of, 36-37, 45-50, 

wages and, viii, 116, 121-31, 
134-35, 153 

Value of Money, The (Anderson), 148n 
Veblen, Thorstein, xiii 
von Mises, Ludwig. See Mises, Ludwig 

Index 189 

wage laws, viii-ix, 115-19 
Wagner Act, 127 
war, inflation and, 14, 16 
wealth, real, 146, 152 
Wealth of Nations, The (Smith), 33-34, 

Wells, David A. 

Recent Economic Changes, 35 
Wheeler, Dan H., 84 

Wicksteed, Philip 

Commonsense of Political Economy, 

Withers, Hartley 

Poverty and Waste, 161 
Woods, Bretton, x 
working week, 46-50, 56, 130 
WPA (Works Projects Administra- 
tion), 56 

Millions have learned sound economics from this classic, 
written at the close of World War II. Written for the non- 
academic, it has served as the major antidote to left-liberal falla- 
cies in the popular press, and has appeared in dozens of 
languages and printings. It’s still the quickest way to learn how 
to think like an economist. This book is so clearly written and 
easy to understand that many free-market activists use it as an 
outreach tool! College students all across America and the 
world still use it and learn from it. It may be the most popular 
economics text ever written. 

About the Author 

Henry Hazlitt — journalist, literary 

critic, economist, philosopher — was one 
of the most brilliant public intellectuals 
of the twentieth century. He was also the 
most important public intellectual 
within the Austrian tradition of Ludwig 
von Mises, F.A. Hayek, and Murray N. 
Rothbard, all of whom he credited as 
sources in economics. He wrote in every important public 
forum of his day, most prominently The Nation, The Wall Street 
Journal, The New York Times (frequently headlining the powerful 
book review section), The American Mercury, Century, The 
Freeman, National Review, Newsweek, and many more. 

Henry Hazlitt 
( 1894 - 1993 ) 

ISBN 978-193355021-3 

9 0 0 0 0 > 

Ludwig von Mises Institute 
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